耶鲁捐赠基金2005年（耶鲁投资办公室年度报告）

The Yale Endowment 2005 Endowment Highlights Fiscal Year 2005 2004 2003 2002 2001 Market Value (in millions) $15,224.9 $12,747.2 $11,034.6 $10,523.6 $10,725.1 Return 22.3% 19.4% 8.8% 0.7% 9.2% Spending (in millions) $ 567.0 $ 502.0 $ 470.1 $ 409.3 $ 337.5 Operating Budget Revenues 1,768.0 1,630.8 1,553.7 1,466.6 1,352.9 (in millions) Endowment Percentage 32.2% 30.8% 30.3% 27.9% 24.9% Asset Allocation (as of June 30) Domestic Equity 14.1% 14.8% 14.9% 15.4% 15.5% Absolute Return 25.7 26.1 25.1 26.5 22.9 Foreign Equity 13.7 14.8 14.6 12.8 10.6 Private Equity 14.8 14.5 14.9 14.4 18.2 Real Assets 25.0 18.8 20.9 20.5 16.8 Fixed Income 4.9 7.4 7.4 10.0 9.8 Cash 1.9 3.5 2.1 0.3 6.2 Endowment Market Value 1950–2005 $16 $14 $12 $10 Billions $8 $6 $4 $2 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Fiscal Year Contents A Message from the Yale University President 2 A Message from the Investment Committee Chairman 3 1. Introduction 4 2. The Yale Endowment 5 3. Investment Policy 8 4. Spending Policy 30 5. Investment Performance 34 6. Management and Oversight 38 7. Ethical Investment Policy 40 Front cover: Wall carving from west façade, Sterling Memorial Library.

Right: View of the Beinecke Rare Book and Manuscript Library in Hewitt Quadrangle, from the colonnade of University Commons.

A Message from For more than three centuries Yale has remained at the forefront of higher eduquence, Yale has an ever greater degree of independence, excellence, and the Yale University cation, even as the challenges universi- stability. ties face have intensified and as the Superior management of Yale’s President scope of operations has expanded from investment portfolio cannot alone regional to national to global. To main- ensure the financial growth and stability tain leadership in this rapidly evolving we need. Crucial to the fortunes of an sphere requires a far-reaching vision as institution with the scope and ambition well as substantial and reliable sources of Yale is the role of our alumni and of financial support. friends in building the Endowment.

We have been fortunate indeed in Gifts to Yale have remained a funda-recent decades to have the management mental engine of the University’s growth of Yale’s financial resources in such throughout the centuries. The report capable hands. The Investment Com- discusses the role of our donors in mittee, chaired by Charles D. Ellis, has advancing Yale’s pursuit of excellence. provided guidance from some of our Financial support from Yale’s assets country’s most sage and resourceful represents a critical underpinning for financial experts. The Investments the University’s aspirations—to build Office, under Chief Investment Officer on the University’s traditional strengths, David F. Swensen, has consistently led to intensify our efforts in laboratory the field of higher education in terms of science, medicine, and engineering, to investment return and growth. think and perform globally, to maintain I know that thousands of readers a student body and faculty second to will appreciate and enjoy, as I have, this none. report on the 2005 Yale Endowment. It is a pleasure to congratulate our You will find here a distillation of the investment team on their remarkable thinking that guides us so well and a performance. At the same time, I ex-description of the policies and discipline press heartfelt thanks to all our dedi-that have kept the value of the Yale cated alumni and friends whose gen-Endowment advancing at unparalleled erosity continues to mean so much rates. With the growth in net worth has to Yale. come steady progress in support for the operating budget. In 1990 the Endow-ment furnished 12 percent of Yale’s operating revenues; today the budget receives approximately 33 percent of its Richard C. Levin funding from this source. As a conse- President Richard C. Levin (right) with Charles D. Ellis, Chairman of the Yale Corporation Investment Committee.

A Message from the As a result of generous support from alumni and friends and the continuing Yale’s process for selecting managers is unusually rigorous, partly because the Investment Committee achievements by the Investments Office, Investments Office staff is so well experi-Yale’s Endowment increased its support enced and so in touch with the markets; Chairman of the University’s expanding budget partly because extensive “due diligence” from 10 percent of revenues in 1986 to contacts are made; and partly because 33 percent in 2006. During the past Yale selects only those managers who two decades, the Endowment’s annual demonstrate considerable strength on support for the University has increased several criteria: investment skills; organi-by $564 million, supported in large part zational coherence; clarity of business by Yale’s $5.4 billion of value-added strategy; appropriate fees and incentives; versus its endowment peers. and, most importantly, personal and This extraordinary achievement quite professional integrity. naturally attracts all the attention, yet Each new manager is recommended close observers can say that the real through a formal memorandum that secret to Yale’s remarkable success is details all “due diligence” research; defense, defense, defense. But how, you explains the manager’s record, organiza-might ask, can defense be so important tion, investment philosophy, and deci-to Yale’s remarkably positive results? sion-making process; and provides the Starting with that great truism of long- professional record of each principal. term success in investing—if investors Each of these in-depth background brief-could just eliminate their larger losses, ings—typically 15 to 20 pages long— the good results would take care of provides the basis for a thorough discus-themselves—we remind ourselves of the sion with staff professionals. Quarterly great advantages of staying out of Investment Committee meetings are trouble. much like an advanced seminar in Yale’s rigorous defense in investing investment theory and practice, led by combines a series of rational initiatives two Yale Ph.D.’s: President Richard rooted in the powerful body of invest- Levin and Chief Investment Officer ment theory developed at Yale and other David Swensen. universities. The architecture of Yale’s Committee members are chosen for portfolio structure is designed to locate their devotion to Yale, their ability to the Endowment portfolio on the efficient work unusually well in a small group, frontier in trade-off between risk and and, most particularly, for their capacity return. Utilizing Monte Carlo simula- to provide effective oversight. Our Unitions, Yale’s portfolio is tested using versity is indeed fortunate to have such thousands of possible scenarios, with capable women and men working so particular attention to avoiding disrup- conscientiously with our professional tive adversity and untoward portfolio team in the Investments Office. outcomes. Yale’s Investment Committee Consistently superior achievement by devotes a full meeting each year to chal- any investment organization depends lenging every aspect of the portfolio ultimately on the people who do the structure in the classic tradition that important work. Yale has a remarkable only the well-tested decision merits team of highly skilled investment profes-strong, sustained commitment. sionals, each with a different area of Selection of specific external man- focus and expertise, who share objectiv-agers adds another powerful defense— ity when making qualitative decisions; and has clearly added significantly to commitment to teamwork; tenacity to Yale’s superior returns. The obvious purpose when searching out or nurtur-risks in manager selection are two: ing relationships with investment man-hiring managers after their best results agers; and appreciation of the impor-and terminating managers after their tance of serving Yale unusually well. worst. Yale strongly favors long-term continuing commitments to very care- Sincerely yours, fully chosen managers, often at an early stage in their development. As a result, serial capital additions to each manager’s mandates are frequent and turnover among Yale’s manager relationships is Charles D. Ellis quite low.

Introduction Yale’s Endowment produced extraordinarily strong results in fiscal year 2005, generating returns of 22.3 percent and gains of $2.8 1 billion. In an environment of single-digit returns for domestic marketable securities, the University’s non-traditional asset classes drove portfolio results. Once again, Yale benefited from the Endowment’s equity orientation, broad diversification, and active management. Over the past ten years, the Endowment grew from $4.0 billion to $15.2 billion. With annual net investment returns of 17.4 per-cent, the Endowment’s performance exceeded its benchmark and outpaced institutional fund indices. The Yale Endowment’s two-decade record of 16.0 percent per annum produced a 2005 Endow-ment value of more than ten times that of 1985. Yale’s superb long-term record resulted from disciplined and diversified asset allocation policies, superior active management results, and strong capital market returns.

Spending from Endowment grew during the last decade from $149 million to $567 million, an annual growth rate of 14 percent. On a relative basis, Endowment contributions expanded from 15 percent of total revenues in fiscal 1995 to 32 percent in fiscal 2005. Next year, spending will approximate $613 million, or 33 percent of projected revenues. Yale’s spending and investment policies have provided handsome levels of cash flow to the operating budget for current scholars while preserving Endowment purchasing power for future generations.

Donors frequently specify a particular purpose for gifts, creat-ing endowments to fund professorships, teaching, and lectureships (23 percent), scholarships, fellowships, and prizes (18 percent), maintenance (4 percent), books (3 percent), and miscellaneous specific purposes (25 percent). The remaining funds (27 percent) are unrestricted. Thirty-four percent of the Endowment benefits the overall University, with remaining funds focused on specific units, including the Faculty of Arts and Sciences (31 percent), the professional schools (22 percent), the library (7 percent), and other entities (6 percent).

Although distinct in purpose or restriction, Endowment funds are commingled in an investment pool and tracked with unit accounting much like a large mutual fund. Endowment gifts of cash, securities, or property are valued and exchanged for units that rep-resent a claim on a portion of the whole investment portfolio. In fiscal 2005 the Endowment provided $567 million, or 32 percent, of the University’s $1,768 million operating income. Other major sources of revenues were grants and contracts of $507 million (29 percent), medical services of $277 million (16 percent), net tuition, room, and board of $234 million (13 percent), gifts of $76 million (4 percent), other investment income of $24 million (1 per-cent), and other income and transfers of $83 million (5 percent).

Endowment Fund Allocation Operating Budget Revenue Fiscal Year 2005 Fiscal Year 2005 Grants & Contracts Professorships Miscellaneous Specific Purposes Tuition, Room, Board Endowment Unrestricted Scholarships Medical Services Other Income Gifts Books Maintenance Other Investment Income Gifts and Endowment Strong growth in the Endowment year, when much of the University’s Institution of Washington, one of during the past two decades raises ques- student body came from affluent back- Andrew Carnegie’s many philantions about the sensibility of contribut- grounds, financial aid totaled only $1.7 thropies, pursues cutting-edge scientific ing to Yale given the apparent wealth million in 2005 dollars. In the year research in astronomy, plant biology, of the University. In fact, recent asset ending June 30, 2005, Yale offered embryology, global ecology, terrestrial growth simply brought Endowment $180.7 million of financial aid, an magnetism, and earth sciences. Estab-contributions to the operating budget amazing 109-fold increase from one lishing the institution in 1902 with a to the historical trend line. Moreover, hundred years earlier. $10 million gift, Carnegie made subse-had the Endowment not benefited from quent gifts to bring the 1910 endow-Gifts Maintain the Endowment’s generous gifts over the years, current ment to $22 million, nearly equal to Relevance support for Yale’s broad program of Harvard’s 1910 fund balance of $23 education and research would be vastly Examining the experience of Harvard, million and vastly exceeding Yale’s diminished. Although the Yale Endow- Yale, and the Carnegie Institution over $12 million. ment is one of the largest in the world, the past 95 years provides insight into Over the course of the past 95 years, donor support remains critical to the the importance of gifts. The Carnegie the Carnegie Institution endowment future of the University.

Gifts Support Yale’s Growth Yale Expands Dramatically 1905–2005 Over the past century, the growth of the Times Yale Endowment mirrored the dramatic expansion of the University’s programs.

In 1905, the Yale Endowment totaled $7.4 million and funded 34 percent of 100 the budget. One hundred years later, the Times Endowment amounted to $15.2 billion and provided 33 percent of the University’s budget. In a surprising commonality with the beginning point of 34 per- 10 cent and the end point of 33 percent, Times Endowment support for Yale’s operations over the last 100 years averaged 33 percent of revenues.

In 1905, Yale had 3,138 students enrolled in the College and eight gradu- Students Faculty Physical Plant Financial Aid ate and professional schools; as of June Growth 1905-2005 30, 2005, Yale had 11,359 students enrolled in the College and twelve post-graduate schools. The expansion was dramatic across the board. New schools founded in those one hundred years include the School of Architecture, the University Revenue by Source 1905–2005 School of Drama, and the School of 100% Management, with the School of Medi-cine expanding its program dramati-cally. The growth of the Yale faculty 80% was even more striking. As of June 30, 2005, Yale employed 3,236 faculty 60% members, approximately seven times the 1905 figure.

With this expansion in the number of 40% students and faculty at Yale came explosive growth in the size of the campus. In 1905, Yale’s physical plant totaled 20% approximately one million square feet; one hundred years later, that figure was around thirteen million square feet, 0% easily outpacing the growth in students 1905 1915 1925 1935 1945 1955 1965 1975 1985 1995 2005 and faculty. Most dramatic, though, was the exponential growth of financial Endowment Tuition, Room Gifts, Grants Medical Services aid offered by Yale. In the 1905 fiscal Income and Board and Contracts and Other more than kept pace with inflation, Gifts Underpin Yale’s Excellence News and World Report in its 2005 with June 30, 2005 assets of $650 report “America’s Best Colleges,” relied Endowments provide the means for million comfortably ahead of the on investment income for 19.1 percent institutions to establish a superior edu-approximately $450 million needed to of their fiscal 2004 budgets; the top cational environment. On the margin, match the rise in price levels. But the three—Harvard, Princeton, and Yale— endowment income attracts better formerly comparable Harvard endow- averaged 31.2 percent, with investment scholars, provides superior facilities, ment, now at $25.9 billion, and the income surpassing all other revenue and funds pioneering research. As a previously smaller Yale endowment, sources. In contrast, fourth quartile result, the ability of endowment to currently at $15.2 billion, dwarf the institutions counted on investment support a large portion of a university’s Carnegie fund. Because the three institu- income for only 6.8 percent of revenues. budget correlates strongly with institutions followed roughly comparable Maintaining an endowment large tional excellence. As the chart below investment and spending policies, the enough to fund a sizable percentage of indicates, a direct relationship exists absence of continuing gift inflows con- a university’s budget clearly correlates between endowment support and edustitutes the single most important with institutional excellence. cational quality. The top quartile of reason for Carnegie’s failure to keep private universities, as ranked by U.S. pace. The result is that Carnegie’s endowment, once one of the largest in the country, now ranks far lower. By way of comparison, had the Yale Endowment grown at the same rate as Gifts Prove Crucial to Endowment Growth 1950–2005 $16 Carnegie’s, it would total approximately $350 million today; Endowment spend-ing would be an insignificant $14 $12 million in fiscal 2006, compared to the actual figure of $613 million.

Billions A more precise understanding of the $8 importance of gifts to Endowment comes from a look at Yale’s post-1950 experience, covering the period for $4 which the University has high-quality financial data. Without the benefit of Endowment gifts to Yale in the last 55 0 years, the 1950 Endowment of $132 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 million would have grown to about 1950 Endowment without Subsequent Gifts Actual Endowment Market Value $3.7 billion by 2005 rather than $15.2 billion. The difference—a staggering $11.5 billion—comes from gifts and investment performance on those gifts.

Yale’s current academic distinction Investment Income Correlates with Quality would be unthinkable without these of Top Research Universities financial contributions. Looking forward, Yale’s Endowment will fail to Fiscal 2004 Percentage of Budget Supported by Investment Income maintain its level of importance to the University over the long term unless Top Three donors continue to provide Endowment support.

First Quartile Second Quartile Third Quartile Fourth Quartile 0 5% 10% 15% 20% 25% 30% 35% Investment Policy Yale’s portfolio is structured using a combination of academic theory and informed market judgment. The theoretical framework relies on mean-variance analysis, an approach developed by Nobel laureates James Tobin and Harry Markowitz, both of whom con-ducted work on this important portfolio management tool at Yale’s Cowles Foundation. Using statistical techniques to combine expected returns, variances, and covariances of investment assets, Yale employs mean-variance analysis to estimate expected risk and return profiles of various asset allocation alternatives and to test sensitivity of results to changes in input assumptions. Because investment management involves as much art as science, qualitative considerations play an extremely important role in portfolio decisions. The definition of an asset class is quite subjective, requiring precise distinctions where none exist. Returns and correlations are difficult to forecast. Historical data provide a guide, but must be modified to recognize structural changes and compen-sate for anomalous periods. Quantitative measures have difficulty incorporating factors such as market liquidity or the influence of significant, low-probability events. In spite of the operational challenges, the rigor required in conducting mean-variance analysis brings an important perspective to the asset allocation process. The combination of quantitative analysis and market judg-ment employed by Yale produces the following portfolio: June Current Asset Class 2005 Target Domestic Equity 14.1% 14.0% Fixed Income 4.9 5.0 Absolute Return 25.7 25.0 Foreign Equity 13.7 14.0 Private Equity 14.8 17.0 Real Assets 25.0 25.0 Cash 1.9 0.0 David F. Swensen ’80 ph.d.

Chief Investment Officer Dean J. Takahashi ’80, ’83 mppm Senior Director The target mix of assets produces an expected real (after inflation) long-term growth rate of 6.2 percent with a risk (standard deviation of returns) of 11.9 percent. Primarily because of shortfalls relative to the target in private equity holdings, the actual allocation produces a portfolio expected to grow at 6.0 percent with a risk of 11.4 percent. The University’s measure of inflation is based on a basket of goods and services specific to higher education that tends to exceed the Consumer Price Index by approximately one percent-age point. At its June 2005 meeting, Yale’s Investment Committee adopted a number of changes in the University’s policy portfolio allocations. The combination of valuation increases in energy, timber, and real estate and new commitments to timber and real estate drove the real assets allocation to the upper end of the speci-fied range. Based on strong investment characteristics, the Commit-tee approved an increase in the real assets target from 20.0 percent to 25.0 percent. The 5.0-percentage-point increase was funded by a 2.5-percentage-point decrease in fixed income to 5.0 percent, a 1.0-percentage-point decrease in each of domestic equity and foreign equity to 14.0 percent, and a 0.5-percentage-point decrease in private equity to 17.0 percent.

The need to provide resources for current operations as well as preserve purchasing power of assets dictates investing for high returns, causing the Endowment to be biased toward equity. In addition, the University’s vulnerability to inflation further directs the Endowment away from fixed income and toward equity instru-ments. Hence, 95.0 percent of the Endowment is targeted for invest-ment in assets expected to produce equity-like returns, through holdings of domestic and international securities, real assets, and private equity.

Over the past two decades, Yale reduced dramatically the Endowment’s dependence on domestic marketable securities by reallocating assets to nontraditional asset classes. In 1985, more than 80 percent of the Endowment was committed to U.S. stocks, bonds, and cash. Today, target allocations call for less than 20 percent in domestic marketable securities, while the diversifying assets of foreign equity, private equity, absolute return strategies, Seth D. Alexander ’95 Director and real assets dominate the Endowment, representing more than 80 percent of the target portfolio.

The heavy allocation to nontraditional asset classes stems from their return potential and diversifying power. Today’s actual and target portfolios have significantly higher expected returns and lower volatility than the 1985 portfolio. Alternative assets, by their very nature, tend to be less efficiently priced than traditional marketable securities, providing an opportunity to exploit market inefficiencies through active management. The Endowment’s long time horizon is well suited to exploiting illiquid, less efficient markets such as venture capital, leveraged buyouts, oil and gas, timber, and real estate.

Alexander C. Banker Director Asset Class Yale’s six asset classes are defined by differences in their expected response to economic conditions, such as price inflation or changes Characteristics in interest rates, and are weighted in the Endowment portfolio by considering risk-adjusted returns and correlations. The University combines these assets in such a way as to provide the highest expected return for a given level of risk.

Domestic Equity Finance theory predicts that equity holdings will generate returns superior to those of less risky assets such as bonds and cash. The predominant asset class in most U.S. institutional portfolios, domes-tic equity, represents a large, liquid, and heavily researched market. While the average educational institution invests 32.0 percent of assets in domestic equities, Yale’s target allocation to this asset class is only 14.0 percent. The domestic equity portfolio has an expected real return of 6.0 percent with a standard deviation of 20.0 percent. The Wilshire 5000 Index serves as the portfolio benchmark. Despite recognizing that the U.S. equity market is highly efficient, Yale elects to pursue active management strategies, aspiring to outperform the market index by a few percentage points annually. Because superior stock selection provides the most consistent and reliable opportunity for generating excess returns, the University favors managers with exceptional bottom-up fundamental research capabilities. Over the past five fiscal years, security selection gener-ated extraordinary returns, as the University outperformed the market by a cumulative 61 percentage points. The efforts of Yale’s external active managers, aided by a tail wind favoring value-oriented and small-capitalization securities, led to this outstanding result.

As a consequence of the domestic equity portfolio’s unconventional structure, Yale experienced significant underperformance preceding the recent success. For the five years prior to the market peak in March 2000, a period when the market favored large-capitalization growth stocks, the University dropped 16 percentage points relative to the market. Only by sticking with an uncomfort-able, contrarian position did the University ultimately benefit from its unusual portfolio.

Alan S. Forman Director In constructing the domestic equity portfolio, Yale pays little attention to sectoral allocations. In fact, the current portfolio con-sists of a variety of specialists seeking to apply in-depth knowledge to concentrated portfolios of securities. The aggregation of individual manager portfolios focused on energy, biotechnology, and technology, along with a number of less specialized managers, bears little resemblance to broad-based market indices. While such a port-folio almost guarantees short-term deviation from market returns, the focused application of deep knowledge to the security selection process sows the seeds for longer-term investment success. Yale’s portfolio typically favors value and small-capitalization stocks. Value stocks, securities that are cheap in relation to funda-mental measures such as book value, earnings, or cash flow, gener-Timothy R. Sullivan ’86 ally outperform the market over the long term, albeit with higher Director volatility of returns. Patient investors reap rewards for taking uncomfortable positions in out-of-favor sectors and securities. Yale’s overweighting of small-capitalization stocks stems from a belief that larger stocks tend to be better followed and more efficiently priced than small-capitalization stocks, offering better opportunities for superior managers to generate excess returns. In addition, studies indicate that, over the very long term, small-capitalization stocks tend to generate slightly higher risk-adjusted returns than do large-capitalization stocks. Thus small-capitalization stocks have a prevailing, albeit somewhat unreliable, wind at their back. When engaging active managers, Yale structures relationships that align the University’s interests with the manager’s. Too many money managers profit by gathering assets at the expense of gener-ating strong investment returns. High levels of side-by-side invest-ment contribute to creating coincidence of interest, as does a manager’s ethical desire to serve the client’s interest. Yale often develops new investment management relation-ships with promising “young and hungry” principals or with an experienced group working independently for the first time. Newer organizations typically have small amounts of assets under manage-ment and something to prove. As investment management organizations progress through their life cycle, Yale monitors relationships carefully to ensure that interests continue to coincide, that assets under management remain at reasonable levels, and that managers stand motivated and capable.

The Investments Office monitors the size of actively managed portfolios, shifting capital both to rebalance market sector exposure and to take advantage of tactical opportunities. Capital allocation to individual managers takes into consideration the sector exposures of the domestic equity portfolio, the degree of confidence Yale pos-sesses in a manager, and the appropriate asset size for a particular strategy. When the University perceives compelling undervaluation in a sector of the market, Yale may allocate additional capital to existing managers and, perhaps, hire new managers to take advantage of the opportunity. Yale’s domestic equity portfolio contains a group of intelli-gent and dedicated managers with high integrity, sound investment Kenneth R. Miller ’71 Associate General Counsel philosophies, strong track records, superior organizations, and competitive advantages. In spite of the difficulty of identifying mis-priced securities, by employing a sufficiently long time horizon the University expects to benefit from the efforts of its domestic equity managers.

Given the efficiency of the U.S. equity market, the University’s performance in the asset class has been remarkable. Over the ten years ending June 30, 2005, Yale’s domestic equity portfolio returned 15.7 percent per annum, outperforming the Wilshire 5000 by 5.8 percent annually, generating $746 million in value added relative to the portfolio’s benchmark.

Michael E. Finnerty Associate Director Student Activities Yale College students enjoy an extraordinary quality of campus life. Donors to Yale’s Endowment have contributed to the undergraduate experience by providing permanent support for a wide variety of student activities, which enrich the learning experience while encouraging leadership and involvement in social services.

A historical review indicates that the issue of student well-being was not a major concern of donors in the early history of Yale College. In the eighteenth and nineteenth centuries, a college education had been more or less The Yale Glee Club in 1888. The man with the long whiskers is Thomas G. Shepard, second director of restricted to the leisure class, with the the club. In the back row, last man on the left, is Amos Alonzo Stagg, b.a. 1888, later a famous football and result that a student’s free time—aside basketball coach. from intercollegiate athletics—remained largely a private matter funded by the individual’s own resources. The notion An early endowment for student musical performance more broadly, that a university should provide stu- activities, the John W. Hendrie Debating including the Sarah E. Cogan Dean’s dents with a pleasant, stimulating, and Fund, established in 1900 by Mr. Discretionary Fund (1978) that provides well-rounded experience became more Hendrie, b.a. 1851, supports what may funds for “singers and their travel and firmly entrenched in the twentieth be the most long-standing extracurricu- for instrument maintenance and century, as reflected in the quickening lar activity at Yale. Debating, which is replacement, among more general pace of contributions to the University closely associated with political life, needs” and the William Weston Bray, Jr. for extracurricular student activity. suits an institution that aspires to pro- (b.e. 1950e) Undergraduate Music Fund With the democratization of higher edu- duce leaders as well as scholars. In (1994) for the support of undergraduate cation came a sense of responsibility for addition to debating, Yale has endowed music programs. Performing arts receive student well-being, as well as a concern support for many prizes for oratory. funding from the 2003 David Shaber for wholesome, organized activity for Other early endowments emphasized ’54 m.f.a. Memorial Fund for Under-undergraduates. cultural pursuits and reinforced Yale’s graduate Performing Arts. association with the arts. A 1907 In 1933, Yale founded the residential endowment originally funded with college system, which created space on contributions from a number of donors campus for the growing body of under-finances the Yale Dramatic Association, graduates (many of whom had previ-known as the Dramat. Endowment ously been forced to live in boarding funding placed student drama produc- houses off campus), divided them into tions on permanent financial footing, small communities, and integrated which has helped cement theater’s place social, extracurricular, and academic as one of the liveliest aspects of Yale’s life. From the 1930s forward, student extracurricular life. Yale’s Philharmonia activity funds tended to be associated Orchestra, another arts-related extra- with the colleges. Each of Yale’s twelve curricular activity, benefits from the residential colleges boasts a number Lucy S. and Henry C. White Fund, of endowments for student activities, which started with a $50,000 bequest which complement funds to support by Mrs. White in 1927. the more academic side of residential One of the most widely supported college life such as seminars, research student activities has been the Glee travel, and scholarly prizes.

Club, which relies on at least eight The earliest of the residential college different endowed funds. Endowment funds for student activities, the Paul support for the Glee Club began with Haviland (b.a. 1927) Memorial Fund the Joseph Horne Holmes Fund of established in 1935, supports an intra-1936, presented by the brother and sons mural golf tournament among the col-of the honoree to “assist the Yale Glee leges. The Haviland fund was unusual Club in meeting expenses.” Some funds for its time in that it promoted athletic thoughtfully provided for travel competition instead of cultural activity.

A poster announcing the performance on June 17, 1911 of a Yale Dramatic Association (“Dramat”) play expenses so the Glee Club can accept A bequest from alumnus Allison V. called “The Knight of the Burning Pestle.” This poster engagements throughout the world. Armour, b.a. 1884, established a fund dates from a few years after the student theater group Other funds support undergraduate in 1941 to enable the master of Daven-received endowed funding in 1907.

port College to acquire books, works of Abraham Pierson Fund of 1991, for endowments address the needs of par-art, or furnishings for the college, par- instance, provides for: (1) college break- ticular groups of undergraduates, such ticularly for the Fellows’ Room. Shortly fasts for graduating seniors and others as the Peter Greeman (b.a. 1954) Fund thereafter the Kent Arnold and Harry residing on campus until Commence- established in 1999 to support Ethnic Llewelyn Evans, Jr. Memorial Fund ment; (2) common room furnishings; Counselors for undergraduates and (1945) gave the master of Berkeley the (3) maintenance and upkeep of the Cultural Connections (a pre-orientation wherewithal to encourage student inter- Pierson squash courts; and (4) other program for freshmen). est in natural sciences and music, but purposes including emergency loans for Endowed funds often reflect the without indicating how that should be students and maintenance of the pool changing character of Yale, providing accomplished on income from a total room, TV room, exercise and weight permanent funding for new initiatives. gift of $1,740. room, and similar facilities. Discre- For example, to support the current A 1936 gift from Hendon Chubb, tionary funds enable the college masters effort to increase international opportuph.b. 1895, created the Chubb Fellow- to support important activities, includ- nities available to Yale students, the ship in Timothy Dwight College to ing social events and celebrations. Richard G. Corey Fund, established in bring distinguished speakers to campus The Residential Colleges Intramurals 2003, provides funds for internships each year. In its nearly seven-decade Fund, contributed by the William and abroad for Yale undergraduates, so that history, the Chubb Fellowship enabled Martha Ford Fund in 1981, provides the students may either perform volun-students to hear talks by national ongoing support for athletic competi- teer services or work in foreign coun-figures including George H.W. Bush, tion among the residential colleges. For tries. The fund helps to make non-Jimmy Carter, Gerald Ford, Betty those with more artistic inclinations, the academic activity abroad affordable for Friedan, John Kenneth Galbraith, and Louis Sudler (b.a. 1925) Performing all students, increasing international Norman Mailer. The guests often partic- Arts Fund supports performing arts interests and knowledge. ipate in the Yale institution known as activities in the residential colleges. Endowments play a crucial role in the Master’s Tea, which brings visitors In a more spiritual vein, religious shaping the character and quality of into the master’s living room for a con- activities receive support from the undergraduate life. Yale’s generous versation with students. Campus visits William Sloane Coffin, Jr. (b.a. 1949, donors have provided a wide variety of by leaders in government, business, b.d. 1956) Fund, established in 1976, funds that expose students to provoca-sports, the arts, and the media undeni- while programs of the Slifka Center for tive ideas, healthy competition, and new ably add luster to a Yale College educa- Jewish Life and the St. Thomas More experiences. tion, providing a real-world comple- Chapel have endowments as well. Some ment to theoretical studies.

Chubb inspired other residential col-leges to follow suit, generating a range of funds for guest lectureships and exchanges with prominent national and international figures. In 1958 the Charles D. Dickey (b.a. 1916, m.a.h.

1946, ll.d. 1963) Davenport College Fund, named for a former fellow of the Yale Corporation, established support for guest speakers, as did the Lovett Lectureship Fund of Pierson College.

Other colleges followed. A similar endowment for the University as a whole, the John-Christophe Schlesinger Visiting Writer Endowment Fund, 1999, has sponsored campus visits by authors including Tobias Wolff, author of This Boy’s Life.

Increasingly, endowments for student activities provide substantial flexibility.

For example, in 1960, several donors combined forces to create the Calhoun College Fund “to be used at the discretion of the Master of Calhoun College for the benefit of the College.” Many years later, in 2003, the Evelyn and John McNiff (b.a. 1983) Calhoun College Fund for Student Activities provided the same flexible student activity The Yale Golf Course, which opened in 1926 on land given to the University in 1923 by Mrs. Sarah Wey support. Most colleges have at least one Tompkins, occupies about 300 acres. The eighteen-hole course hosts the Yale men’s and women’s varsity golf such discretionary master’s fund that teams as well as the annual Yale College intramural golf tournament, which receives support from the Paul serves a great range of purposes. The Haviland (b.a. 1927) Memorial Fund.

Fixed Income Fixed income assets generate stable flows of income, providing greater certainty of nominal cash flow than any other Endowment asset class. The bond portfolio exhibits a low covariance with other asset classes and serves as a hedge against financial accidents or periods of unanticipated deflation. While educational institutions maintain a substantial allocation to fixed income and cash, averag-ing 19.5 percent, Yale’s target allocation to fixed income constitutes only 5.0 percent of the Endowment. Bonds have an expected real return of 2.0 percent with risk of 10.0 percent. The Lehman Broth-ers U.S. Treasury Index serves as the portfolio benchmark. Yale is not particularly attracted to fixed income assets, as they have the lowest historical and expected returns of the six asset classes making up the Endowment. Still, fixed income plays an important role in the Endowment by providing a diversifying hedge against financial accidents or periods of unanticipated deflation. To achieve this hedge, the Endowment invests primarily in high-quality instruments backed by the full faith and credit of the U.S. govern-ment. Yale’s portfolio emphasizes non-callable securities, ensuring that the Endowment receives the hoped-for protection in periods of declining interest rates.

The government bond market is arguably the most efficiently priced asset class, offering few opportunities to add significant value through active management. In fact, most fixed income managers play a cynical game, consciously exposing client assets to greater-than-benchmark risk and claiming that the incremental returns rep-resent superior performance. As the bond managers pocket fees for providing a disservice, clients lose in more than one way. In addition to the out-of-pocket costs for active management, clients lose the protection afforded by high-quality, non-callable fixed income instruments.

One way in which active managers “outperform” a fixed income benchmark is by overweighting credit-sensitive issues. Under normal circumstances, corporations meet their contractual obligations, providing a spread over the U.S. Treasury return to investors willing to accept credit risk. However, in times of crisis, just when investors most need the protection provided by fixed income portfolios, the markets discount the value of corporate promises-to-pay, Randy Kim ’98, ’04 mba Associate Director impairing the defensive character of corporate bond investments. Another method employed by active managers is to increase the optionality of fixed income holdings. By holding callable corpo-rate or mortgage-backed securities, bond managers again increase returns under normal circumstances. Yet, when interest rates decline, companies and homeowners repay callable debt to refinance existing obligations at lower rates. In periods of deflation, just when declining rates ought to boost bond portfolio value, the presence of callable instruments dampens portfolio appreciation and undermines the fundamental reason for holding bonds.

Most active management strategies hurt investors by failing to generate risk-adjusted excess returns and by diluting the hedging characteristics of high-quality, non-callable bond investments. Peter H. Ammon ’05 mba, ’05 ma Investors holding pure fixed income—long-term obligations of the Senior Associate U.S. government—best meet the crisis protection and deflation hedging requirements for bond portfolios.

Yale generally engages external managers to make active security selection decisions, operating with the philosophy that superior investment results stem from creating partnerships with top-notch managers around the globe. Fixed income represents the exception that proves the rule. Based on skepticism about active fixed income strategies and belief in the efficacy of a highly struc-tured approach to bond portfolio management, the Investments Office chooses to manage Endowment bonds internally. In spite of an aversion to market timing strategies, credit risk, and call options, Yale manages to add value consistently. Primarily by identifying overlooked, illiquid securities, over the past decade the Investments Office produced returns of 7.4 percent per annum, 67 basis points per year above the benchmark return. Creative, patient portfolio management leads to superior investment results without impairing the portfolio protection characteristics of high-quality fixed income. Sensible investors focus on the diversifying characteristics of long-term government bonds, holding only the amount necessary to protect portfolios against financial trauma. If portfolios include the minimum allocation necessary to provide insurance against catastrophe, investors free up assets to diversify into alternative asset classes, achieving volatility reduction without sacrificing return. A low allocation to high-quality fixed income reduces the costs associ-ated with holding bonds during normal circumstances and periods of unanticipated inflation, the environments in which fixed income positions tend to impair portfolio performance. Tailoring the bond portfolio to emphasize fixed income’s essential diversifying characteristics increases expected benefits in time of crisis, while reducing the long-term costs of holding bonds.

David B. Slifka ’01 Senior Associate Celeste P. Benson Senior Portfolio Manager Policy Asset Allocation Targets Establishing policy asset allocation increase along with inflation, producing horizon—is 17 percent. In contrast, the targets represents the heart of the an important diversification for invest- average endowment runs a 36 percent investment process, as no other aspect ment portfolios. In addition to attrac- chance of spending disruption and a of portfolio management plays as great tive diversifying characteristics, real 33 percent chance of impairment. a role in determining a fund’s ultimate assets present tremendous opportunities Even though Yale’s portfolio has performance. Yale’s target allocation is for superior managers to add value and changed dramatically from its position achieved using a combination of quanti- outperform industry averages. The illiq- in the mid 1980s, moving from a typtative and qualitative analysis. By uid nature of real assets, information ical institutional portfolio dominated by employing the quantitative tool of asymmetries, and the importance of marketable securities to a well-diversi-mean-variance optimization, the Invest- operating skill all contribute to the fied, equity-oriented collection of assets, ments Office identifies efficient portfo- chances for active management success. the year-to-year changes tended to be lios with expected returns that surpass Yale’s newly adopted target asset small. Most years saw changes in those of all other portfolios for the allocation produces an expected real targets of 2.5 percent or 5.0 percent; same level of risk. Inputs to the process (after inflation) long-term growth rate in fact, in seven of twenty years no include estimated return, risk, and cor- of 6.2 percent per annum with a risk changes occurred at all. relation measures for different asset (standard deviation of returns) of 11.9 Yale’s asset allocation targets are classes. Important qualitative considera- percent. This risk-return combination reviewed only once per year, limiting tions include the nature of active man- compares favorably to the average the possibility of damage from illagement opportunities, the degree of endowment portfolio, which offers an considered moves made in response to asset class illiquidity, the value of gradu- expected real return lower than Yale’s, the gloom or euphoria imbuing market alism in making changes, and Yale’s with higher risk. Yale’s spending disrup- conditions. During the 1987 stock comparative advantages as an investor. tion risk—defined as the likelihood of a market crash, a 25-standard-deviation In producing portfolio recommenda- real reduction of 10 percent in spending event in which the domestic equity tions, the Investments Office comple- from the Endowment over any five-year market fell more than 20 percent in ments top-down mean-variance opti- period—is 24 percent for the current one day, Yale maintained policy targets mization with bottom-up assessment of target portfolio. Impairment risk— in the face of pressure to move assets market conditions. By evaluating the defined as the likelihood of losing half out of stocks into fixed income. In absolute and relative attractiveness of of purchasing power over a fifty-year fact, shortly following the crash, Yale investment opportunities uncovered by Yale’s far-ranging roster of external investment managers, the Investments Office directs funds toward more attractive opportunities and away from less compelling situations. Nonetheless, Yale Diversifies Policy Asset Allocation Targets 1985–2005 100% given the long-term nature of policy targets, bottom-up considerations play 90% a secondary part in the asset allocation process relative to the lead role of 80% mean-variance optimization.

In June 2005 the University adopted 70% a number of changes in policy targets.

Real assets moved from a target of 20.0 60% percent to 25.0 percent, while fixed income moved from 7.5 to 5.0 percent, 50% domestic equity moved from 15.0 to 40% 14.0 percent, foreign equity moved from 15.0 to 14.0 percent, and private 30% equity from 17.5 to 17.0 percent.

The real assets portfolio has grown 20% rapidly in recent times due to increases in valuations and robust deal flow; the 10% shift from a 20.0 percent target to 25.0 percent closes the gap between the Uni- 0 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 versity’s actual and target allocations.

Real assets, with attractive expected Fiscal Year returns and the ability to hedge against inflation, represent an ideal core invest- U.S. Equity U.S. Bonds Foreign Equity Absolute Return Private Equity Real Assets ment for the Endowment. Real asset equity investments provide claims on Prior to 1999, Real Assets included only real estate. Oil and gas and timber were classified future streams of income that tend to as Private Equity purchased tens of millions of dollars of term investment strategies. Yet, many remains ahead of the curve: with the S&P 500 Index futures to rebalance the institutions fail to honor these basic Endowment’s six asset classes exhibiting portfolio to long-term targets. While tenets. In the mid 1980s typical endow- allocations between 5 percent and 25 other institutions sold depressed equi- ment portfolios exhibited neither diver- percent, the portfolio meets the test of ties, purchased inflated bonds, and sification nor equity orientation, as they diversification; with five high expected missed the ensuing recovery, Yale did consisted of roughly 50 percent domes- return asset classes accounting for 95 not reverse—after the fact—positions it tic equities, 45 percent domestic bonds percent of assets, the portfolio embodies had adopted as part of a recent annual and cash, and 5 percent alternative a substantial equity orientation. By policy target review. Accordingly the strategies. Two decades later, average implementing a diversified, equity-University was spared from a counter- allocations have made only some oriented asset allocation, Yale’s Endow-productive whipsaw. progress, with approximately 32 ment is well positioned to serve the Serious investors recognize that the percent in domestic equities, 20 percent needs of both current and future gener-principles of diversification and equity in bonds and cash, and 48 percent in ations of scholars. orientation underlie successful long- alternative strategies. But Yale Foreign Equity Investments in overseas markets give the Endowment exposure to the global economy, providing substantial diversification. Because forces that drive markets differ from country to country, market returns will vary from one country to another. This diversification, quantitatively reflected in the foreign equity portfolio’s expected cor-relation of 0.7 to domestic equities, reduces the Endowment portfolio’s level of risk. Additionally, the large volume of undercovered companies listed in foreign markets and the inefficiencies in their pricing create opportunities to earn above-market returns through active management.

Yale’s foreign equity target allocation of 14.0 percent stands slightly below the average endowment’s allocation of 17.4 percent.

Expected real returns for developed equities are 6.0 percent with risk of 20.0 percent, while emerging equities are 8.0 percent with a risk level of 25.0 percent. The portfolio is measured against a composite benchmark of 50 percent developed markets, measured by the Morgan Stanley Capital International (msci) Europe, Australasia, and Far East Index, and 50 percent emerging markets, mea-sured by the msci Emerging Markets Index. Emerging markets, with their rapidly growing economies, are particularly intriguing, causing Yale to target one-half of its foreign portfolio to developing countries. Emerging markets tend to be less efficient than developed markets, a consequence of illiquidity, little research coverage, and relatively unsophisticated local investors.

Emerging markets provide an expanded set of investment opportunities, with a large number of companies well positioned to benefit from rapidly growing and changing economies. Given expectations of powerful underlying economic growth plus greater opportunities to find undervalued stocks, developing countries constitute an attractive arena for active management.

Yale looks for foreign equity managers that concentrate on creating portfolios using bottom-up stock selection rather than top-down macro considerations. Accordingly, Yale’s country, sector, and security allocations may differ significantly from those of broad global indices. Small-capitalization stocks, lying below the radar screen of large institutional funds, offer particularly compelling opportunities to add value. Although some of Yale’s managers have global mandates, Yale recognizes the value of managers that specialize regionally. A regional mandate facilitates the conduct of intensive company research, creating an edge over less focused global funds.

Country allocations heavily influence overall performance in foreign equities. Unfortunately, forecasting country returns proves difficult in developed markets and provides a generally unreliable source of value added. In emerging markets, country valuations sometimes move to extremes that offer identifiable top-down opportunities to generate excess returns. In general, however, Yale’s man-agers focus on identifying bottom-up security-specific investments. The Investments Office monitors the size of actively managed portfolios, shifting capital to take advantage of tactical opportuni-ties. Capital allocation to individual managers takes into consideration the degree of confidence Yale possesses in a manager, the country allocation of the manager’s portfolio, and the appropriate size for a particular strategy. In addition, Yale sometimes exploits compelling undervaluations in a country, sector, or strategy by hiring a new manager to take advantage of the opportunity. Although Yale’s foreign equity managers pursue a broad range of investment mandates, they share a commitment to funda-mental research. In the developed portfolio, Yale has core allocations to managers that search for undervalued securities, employing proprietary models to identify value. Investment approaches range from using highly sophisticated quantitative modeling techniques, to conducting thorough bottom-up company analysis, to identifying out-of-favor, asset-rich companies at deep discounts to fair value. Yale manages internally a portfolio of closed-end funds and invest-ment trusts that contain both developed and emerging market equi-ties. Through these vehicles the University can increase or decrease exposure to foreign markets as needed and add incremental value by purchasing at wide discounts and selling at narrower discounts. In the developing markets portfolio, Yale employs a global Anne Martin emerging markets manager complemented by managers with Senior Research Consultant regional concentrations in Eastern Europe, Russia, Asia, and Africa. The University’s managers use fundamental research to understand potentially attractive companies, often making hundreds of company visits per year.

In general, Yale’s managers do not hedge currencies, since a modest amount of exchange rate exposure actually improves overall portfolio diversification. However, managers will occasionally incorporate insights on exchange rates into security selection decisions, such as by favoring exporters in countries with weakening currencies. In extreme circumstances, some of Yale’s managers will selectively hedge foreign exchange exposure back to the dollar or to other currencies.

The University’s performance in foreign equities has been Shuba V. Raghavan Senior Research Associate outstanding. Over the ten years ending June 30, 2005, Yale foreign equities returned 12.7 percent per annum, more than twice the annualized 6.1 percent return of the asset class’s composite bench-mark, generating $672 million in value added relative to the portfolio’s benchmark.

Absolute Return In July 1990, Yale became the first institutional investor to pursue absolute return strategies as a distinct asset class, beginning with a target allocation of 15 percent. Unlike traditional domestic and foreign equity investments, absolute return investments provide returns largely independent of overall market moves. In contrast with diversifying investments such as cash and bonds, absolute return strategies have excellent prospects of generating high long-term real returns coupled with low risk. Absolute return investments seek to generate high long-term real returns by exploiting market inefficiencies. The absolute return portfolio is managed by investment firms pursuing a wide variety of strategies, which can be broadly categorized as event-driven or value-driven. Event-driven strategies generally involve hedged positions in mispriced securities and depend on a specific corporate event, such as a merger or bankruptcy settlement, to achieve tar-geted returns. Value-driven strategies also entail hedged investments in mispriced securities, but rely on changing company fundamentals or increasing market awareness to drive prices toward fair value. Today, the absolute return portfolio is targeted to be 25.0 percent of the Endowment. In contrast, the average educational institution allocates 17.6 percent of assets to such strategies. Absolute return strategies are expected to generate real returns of 6.0 percent with risk levels of 10.0 percent for event-driven strate-gies and 15.0 percent for value-driven strategies. An important attribute of Yale’s investment strategy concerns the alignment of interests between investors and investment man-agers. To that end, absolute return accounts are structured with performance-related incentive fees, hurdle rates, and clawback provi-sions. In addition, managers invest a significant portion of their net worth side by side with Yale. In any investment arrangement, when gains are strong, managers benefit and Yale profits. But if losses are Jay L. Kang ’02 incurred, only providers of capital suffer. Significant general partner Senior Financial Analyst co-investment ensures that losses will be felt by both the manager and Yale. By aligning the interests of Yale and its managers, the University avoids many of the potential pitfalls of the principal-agent relationship. Given the opportunistic aspect of the absolute return asset class, Yale seeks to vary capital commitments in response to degrees of opportunity. Fluctuations in bankruptcy rates and merger activity, as well as changes in regulatory environment and valuation levels all affect the relative attractiveness of absolute return strategies. Yale structures accounts to allow timely cash flows (in and out) in order to match asset size with investment opportunities. The University is wary of dedicated specialist funds that lock up investor assets, encouraging managers to put money to work regardless of the Daniel G. Kilpatrick ’03 Senior Financial Analyst investment climate. We prefer to hire managers with the depth, scope, and experience to assess and allocate funds across more than one strategy.

Since June 30, 1990, the absolute return portfolio has achieved its goal of generating high returns with modest volatility and low correlation to domestic equity markets. The portfolio has returned an annualized 12.7 percent in the fifteen years since its inception, outperforming its benchmark by 1.7 percent. In addition, the portfolio has outperformed the Wilshire 5000 return of 10.8 percent over the relevant time period. The monthly standard deviation of the portfolio was a remarkably low 5.1 percent annualized, relative to 14.6 percent volatility exhibited by the Wilshire 5000. The correlation of monthly returns with the Wilshire 5000 has been exactly zero, highlighting the significant diversification effect of the asset class.

Private Equity Private equity offers extremely attractive long-term risk-adjusted return characteristics, stemming from the University’s strong stable of value-added managers that exploit market inefficiencies. Yale’s private equity investments include participations in venture capital and leveraged buyout partnerships. The University’s target allocation to private equity of 17.0 percent far exceeds the 6.1 percent actual allocation of the average educational institution. In aggregate, the private equity portfolio is expected to generate real returns of 11.4 percent with risk of 29.0 percent.

Yale was among the first institutional investors to participate in the now widely pursued asset class of private equity, making its first commitment to leveraged buyouts in 1973 and to venture capital in 1976. The University participates in private equity through partnerships managed by the nation’s leading private equity firms, including venture capitalists Greylock, Kleiner Perkins, Sequoia, and Sutter Hill, and buyout specialists Bain Capital, Berkshire Partners, Clayton Dubilier & Rice, and Madison Dearborn Partners. Yale’s private equity program is regarded as one of the best in the institutional investment community and the University is frequently cited as a role model by other investors. Since inception in 1973, private equity has generated a 31.0 percent annual return; over the past ten years Yale’s private equity portfolio has generated Carrie A. Abildgaard a 39.5 percent annual return, including an amazing return of 168.5 Financial Analyst percent in fiscal 2000, when the University made $2.1 billion on its private equity investments. The success of Yale’s program led to a 1995 Harvard Business School case study, “Yale University Invest-ments Office,” by Professors Josh Lerner and Jay Light. The popular case study was updated in 1997, 2000, and 2003.

Yale’s private equity assets concentrate on partnerships with firms that emphasize a value-added approach to investing. Such firms work closely with portfolio companies to create fundamentally more valuable entities, relying only secondarily on financial engi-neering to generate returns. Investments are made with an eye toward long-term relationships—generally, a commitment is expected to be the first of several—and toward the close alignment of the interests of general and limited partners.

Dennis Hong ’05 Financial Analyst Of particular note has been the success of Yale’s venture capital managers, which have started some of the nation’s leading companies. In the 1970s and 1980s, Yale participated in a number of start-ups that defined the technology industry, including Compaq Computer, Oracle, Genentech, Dell Computer, and Amgen. The high-flying 1990s included lucrative investments in Amazon.com, Yahoo, Cisco Systems, Red Hat, and Juniper Networks. Yale’s more recent investment in Google illustrates the home-run potential of venture capital investing; the University’s $300,000 investment generated $75 million of gains after the company went public in 2004. While lacking the dramatic appeal of venture investments, Yale’s leveraged buyout investments have delivered high returns with remarkable consistency. Notable transactions in which Yale participated through its leveraged buyout firms include Snapple Beverage, AutoZone, Lexmark International, Kinko’s, Carter’s, and Domino’s Pizza.

Increasingly, Yale has invested in private equity abroad. The European leveraged buyout market has emerged as an appealing investment opportunity, as private equity gains more widespread acceptance. Venture capital in Asia presents intriguing potential, albeit with the increased risks of investing in developing countries with less well-established laws and markets.

The successes of Yale and other long-time investors in private equity have attracted numerous new investors to the field. Vastly larger sums of capital have been raised, prompting concerns about future returns. The hallmark of Yale’s successful private equity program has been long-term relationships with the very best venture capital and leveraged buyout managers. By aligning itself with these premier firms, the University hopes to continue to generate attractive returns in an increasingly competitive marketplace.

Real Assets Real estate, oil and gas, and timberland share common characteris-tics: sensitivity to inflationary forces, high and visible current cash flow, and opportunity to exploit inefficiencies. Real assets invest-ments provide attractive return prospects, excellent portfolio diversification, and a hedge against unanticipated inflation. Yale’s 25.0 percent long-term policy allocation significantly exceeds the average endowment’s commitment of 7.5 percent. Expected real returns are 6.0 percent with risk of 15.0 percent.

Holdings of real assets offer risk and return characteristics well suited for the Yale Endowment. Real assets represent claims on future streams of inflation-sensitive income, supplying protection against unanticipated inflation and playing an important diversify-ing role in the portfolio. Real assets provide relative stability to the Endowment during periods of public market turmoil, at the price of an inability to keep pace during bull markets. In addition to attractive diversifying characteristics, real assets present tremendous opportunities for superior managers to add value and outperform industry averages. The illiquid nature of real assets and the information-intensive aspects of the transaction processes favor skilled and experienced investors.

To take advantage of inefficient real estate, oil and gas, and timberland markets, the University seeks talented and motivated investment managers with proven ability to create value indepen-dent of underlying market or commodity price movements. Believ-ing that the basic return from real assets investments can be aug-mented by operational expertise, Yale looks for firms with superior operating capabilities, as opposed to groups with only financial engineering skills. Yale’s strong preference is to work with operators that focus on a geographic region or property type, or both, believ-ing that specialized managers with deep market knowledge and experience gain an important edge over more diffuse organizations. Yale attempts to create strong, long-term partnerships in which the interests of the University and its investment managers are closely aligned. Yale requires investment managers to own a meaningful economic interest in every deal, encouraging thoughtful acquisitions, careful oversight, and timely dispositions. Yale targets employee-owned firms to ensure that incentive compensation bene-Nicholas T. Shalek ’05 fits the individuals doing the work and that general partner co-Financial Analyst investment comes principally from the partners of the firm. Yale demands that its partners maintain reasonable levels of assets under management, encouraging pursuit of only the most attractive opportunities and forcing managers to create wealth through the generation of high returns rather than the collection of large annual management fees. Yale’s investment strategy compels the University to support emerging investment management groups that are not well-known, brand name companies. Even though newly formed groups typically include several highly experienced and talented founding partners, backing start-ups exposes the University to managerial and organizational risk as the individuals attempt to jell as a team and the management company seeks a stable financial footing. In spite of Xiaoning Wu ’04 Financial Analyst the risks, the University benefits enormously from the close relation- ships forged with organizations that Yale introduced to the institutional funds management business. Yale prefers real assets investments that generate a current cash yield, whether from property rents, reserve production, or sustainable timber harvests. The presence of a substantial cash yield makes the total return on investment less sensitive to the length of the holding period and reduces valuation risk. Yale garners a margin of safety by paying a low purchase price. In real estate deals, Yale pursues investments in which asset pricing is at a discount to replacement cost; in oil and gas, reserve acquisitions at a discount to long-term normalized pricing; and in timber, forestland at a substantial discount to standing timber value. In the real estate portfolio, Yale developed a deep roster of investment managers focused on multiple property types and geo-graphies. Because local supply and demand play a large role in determining market returns, much of the real estate portfolio is located in supply-constrained areas. Reflecting the University’s bias toward focused managers, the portfolio’s largest managers are niche players, concentrating on narrowly defined areas, such as prime office buildings in central business districts of major metropolitan markets, retail assets in the Northeast, and office and residential properties in the Westside submarket of Los Angeles. Specialized managers with excellent market knowledge provide enormous value added, supporting the notions that real estate is not a commodity and that values can vary tremendously even between neighboring properties.

In the oil and gas and timber arenas, price changes in the underlying commodity strongly influence investment returns. Unfortunately, macroeconomic and political factors drive commodity prices, making them extremely difficult, if not impossible, to fore-cast. Rather than depend on uncertain future price increases, Yale’s natural resource investments must meet return targets in flat price environments. If commodity prices rise, Yale’s natural resource port-folio will generate handsome performance even as other parts of the Endowment suffer from the higher costs of basic materials and energy.

In the oil and gas portfolio, Yale emphasizes the low-risk Matthew L. Ramadanovic purchase of high-quality proven reserves. In finding managers that evaluate and operate assets more efficiently than large oil and gas companies, Yale generates substantial returns without depending on higher-risk exploration strategies. A portion of the energy portfolio is allocated to private investments in which investment managers take meaningful stakes in energy exploration, production, or service companies, and attempt to influence the management and growth of the companies.

When investing in timberland, Yale concentrates on the pur-chase and sustainable management of natural forests in the United States. While generally slower-growing than plantation forests, natural forests tend to be priced less efficiently and to offer more opportunities for skilled managers to add value through silvicultural activities, selective harvests, and wood merchandising. Like value Thad C. Brown ’92 stocks in the marketable securities world, slower-growing forests sometimes can be purchased for overly discounted prices because of lack of interest by other investors.

In real assets, like other asset classes, Yale seeks value and behaves in a contrarian manner. Investments reflect compelling opportunities and the University’s ability to find suitable managers, regardless of activity in the broad market. This approach has gener-ated strong investment performance and important diversification to the Endowment. Over the ten years ending June 30, 2005, the port-folio returned an annualized rate of return of 17.7 percent, surpass-ing the benchmark return of 9.8 percent. Correlations over the last ten years between real assets and Yale’s other asset classes have been extremely low, ranging between a low of -0.04 with the foreign equity asset class and a high of 0.29 with the absolute return asset class.

Asset Allocations Yale Educational University Institution Mean Domestic Equity 14.1% 32.0% Fixed Income 4.9 16.3 Absolute Return 25.7 17.6 Foreign Equity 13.7 17.4 Private Equity 14.8 6.1 Real Assets 25.0 7.5 Cash 1.9 3.2 Data as of June 30, 2005 The Class of 1954 Environmental Science Center on Sachem Street adjacent to the Peabody Museum.

Liquidity Many market participants place an investors paid dearly for evaporated Investments in companies backed by extraordinary value on liquidity. Players in the panic selling on October 19, just venture capital illustrate the rewards of seek the ability to trade out of yester- when the ability to make an immediate accepting illiquidity. In December 1997, day’s loser and acquire today’s hot sale might have had value. eToys, an online retailer, received its prospect, to sell during a market panic J. M. Keynes argued in The General first round of private financing, valuing and buy into a bull market. Managers Theory that “of the maxims of ortho- the company at $15 million. Obviously, responsible for large sums of money dox finance none, surely, is more anti- as a privately held start-up, shares of focus on heavily traded securities, social than the fetish of liquidity, the the concern exhibited extreme illiquid-allowing movement in and out of posi- doctrine that it is a positive virtue on ity. When eToys went public on May tions with minimal market impact. the part of investment institutions to 20, 1999, quadrupling on the first day However, in pursuing more-liquid secu- concentrate their resources upon the of trading, the company’s value skyrities, investors often miss out on the holding of ‘liquid’ securities. It forgets rocketed to $7.8 billion, representing opportunity to establish positions in that there is no such thing as liquidity an extraordinary gain for the original illiquid securities at meaningful dis- of investment for the community as a private investors. counts to fair value. whole.” Liquidity of securities tends to Highly liquid large-capitalization In fact, less frequently traded assets increase and decrease as the popularity stocks receive extensive coverage, gener- can provide good returns relative to of the underlying assets waxes and ating enormous amounts of public data. liquid ones. pefco bonds, obligations wanes. On the day when eToys went The widespread availability of informa- of the Private Export Funding Corpora- public, approximately $1 billion worth tion contributes to an environment in tion, enjoy the full faith and credit of shares traded. Not even two years which investors have difficulty in backing of the U.S. government. later, when eToys filed for bankruptcy, obtaining an analytical edge. In con- Because pefco bonds are issued in trading volume amounted to only trast, less liquid small-capitalization smaller amounts and receive less atten- $100,000. Clearly, a mindset that stocks have less available information, tion than more liquid U.S. Treasury avoids illiquid start-ups and prefers creating an opportunity to be rewarded bonds, buyers can expect that they will highly liquid ipos carries a clear set for uncovering nuggets of data relevant be more difficult to trade. In return, of risks. to valuation. Rewarding investments owners receive higher returns. In May Once illiquid private investments tend to reside in dark corners, not in 2005 the Investments Office bought succeed, liquidity follows as investors the glare of floodlights. pefco 4.55 percent bonds set to mature clamor for shares of the hot initial The liquidity so many investors seek on May 15, 2015 at a yield of 4.57 public offering. In contrast, if public, tends to disappear when most needed. percent. Compared to U.S. Treasuries liquid investments fail, liquidity dries In the crash of October 1987, market maturing on the same date, the pefcos up as a company falls from favor or makers possessed neither the resources provided an incremental yield of 37 declares bankruptcy. Investors should nor the willingness to absorb the extra- basis points. Earning a spread over fear failure, not illiquidity. ordinary volume of selling demand that U.S. Treasuries for U.S. Treasury equiv-materialized. The liquidity that alent credit makes sense.

Average Endowment Liquidity Yale Endowment Liquidity June 30, 2005 June 30, 2005 Liquid Assets Liquid Assets 68.9% 34.6% Illiquid Assets Quasi-Liquid Assets 39.8% 25.7% Quasi-Liquid Assets 17.6% Illiquid Assets 13.6% Liquid Assets: Marketable Equity, Bonds, and Cash Quasi-Liquid Assets: Absolute Return Illiquid Assets: Private Equity and Real Assets Yale’s Schools for the Arts Architect Louis Kahn, painter John Trumbull, director Lloyd Richards, and composer Charles Ives have two things in common. First, these individuals were world-renowned artistic figures.

Second, they are closely associated with Yale—but not just because they studied, taught, or practiced their craft here.

Their names grace endowed funds in the School of Architecture, School of Art, School of Drama, and School of Music. Other distinguished individuals who share an association with Yale and the Endowment include architects James Gamble Rogers, Paul Rudolph, William Leffingwell, 1765-1834 and Eero Saarinen; designer Paul Rand (in a portrait by John Wesley Jarvis, ca. 1805-15), is commemorated in the and painter Andrew Forge; playwright William Leffingwell Professorship of Eugene O’Neill; author Rebecca West; Painting and Design, endowed by his actress-singer Lotte Lenya; and com- daughter, Mrs. Caroline L. Street, in posers Virgil Thomson and Mitch 1878. The Leffingwell chair at the Leigh. School of Art has been held by major artists including Andrew Forge (photo), The University’s prominence in this whose celebrated painting The Tree domain, epitomized by the existence of of Life hangs in the Yale Center for four distinct fine arts schools, arose British Art. from the vision of the faculty. While endowment gifts helped to foster the excellence of these schools, to maintain leadership the University’s arts institutions must increase the role of endowed Augustus Russell Street, b.a. 1812. Mr. new School of Art’s Holcombe T. funding for such essential needs as Street, whose name still adorns Street Green, Jr. Hall and presented Mr. teaching and financial aid.

Hall, was an early benefactor of the art Rand’s personal library to the School. The oldest of Yale’s arts institutions, gallery. The Street bequest established Funding for financial aid includes the School of Art, traces its history back the Leffingwell Chair to be held by a the Rebecca Taylor Porter Scholarship to 1864 when Yale founded the nation’s distinguished professor of painting who established in 1923; the George R. first university-affiliated school of fine is “a practical artist of acknowledged Bunker (1945w) Fund established in arts, under a committee that included ability.” The incumbent since 1999, 1989 with preference for students in painter and inventor Samuel F. B.

Professor Richard Lytle, has produced Painting, Printmaking, or Sculpture; Morse, an 1810 graduate of Yale works ranging from giant oil paintings and the Norman Ives Scholarship Fund College. The School began to offer to watercolors to ink drawings. The established in 1997, the gift of Azar instruction in architecture in 1908 and position has been held in the past by Khosrovi Ivorsohk (m.f.a. 1972) and drama in 1925. The School of Music distinguished artists such as Andrew friends and family in memory of became a distinct institution in 1894, Forge (1923–2002), Jack Tworkov Norman Ives. A graduate of the School and subsequently the University estab-(1900–82), and John Ferguson Weir of Art, Ives had a distinguished career lished separate graduate-level schools (1841–1926). Mrs. Street’s bequest also in graphic design and as a member of for the other disciplines; the School of created the Caroline Leffingwell Street the faculty of the School. Drama traces its official establishment Professorship in the field of graphic The School has benefited throughout to 1955 and the Schools of Art and design. its history from the role of bequests by Architecture became distinct institutions A noted designer and long-term artists affiliated with the institution. in 1972, though they shared the Art faculty member is commemorated by Endowments at the School of Art also and Architecture Building until 2000. the Paul Rand (m.a.h. 1985) Annual include several unrestricted funds, such Lectureship in Design, which was as the Timothy Dwight Fund, created in School of Art funded by the Cummins Engine Foun- 1900, and the Mary E. Ives Fund of As the oldest professional arts school, dation and other donors in 1997. Mr. 1908. Unrestricted endowments provide the School of Art benefits from some Rand (1914-96) is remembered as a important flexible, long-term support of Yale’s longest-standing arts-related pioneering graphic designer whose cor- for evolving needs. endowed funds. The earliest of the porate logos for such firms as United important funds for the School is the Parcel Service, ibm, and abc have William Leffingwell Fund, which came become icons of American commerce. through an 1878 bequest from Caroline Marion Rand, his widow, contributed Mary Leffingwell Street, widow of generously toward the renovation of the School of Architecture Yale has an internationally recognized School of Architecture whose alumni are among the most prominent architects of the twentieth century. Endowed funds have a direct impact on its ability to attract students and pre-eminent faculty.

Support for faculty includes such long-standing endowments as the Architectural Teaching Fund, established in 1909 through a gift from alumni Henry Fowler English (ll.b. 1874) and John Davenport Wheeler (ph.b. 1858). Professorships at the School, which honor donors, alumni, and distinguished faculty, ensure that leaders in the field from all over the world continue to provide outstanding teaching at Yale.

Among the School’s endowed chairs, the J. M. Hoppin Professorship of Architecture has a particularly distinguished history. The chair was created in 1923 through a bequest from James Mason Hoppin, b.a. 1840, a longtime Yale faculty member (1861–99). The Hoppin Professorship has been held by distinguished architects including Everett Victor Meeks, former Dean of the School of Fine Arts (1922–47), Eero Saarinen (top left), one of the leading architects of the international movement in the mid-twentieth century, and Architecture Chairs George Howe designed several Yale buildings including the David S. Ingalls Rink. He taught at the School of Architecture and (1950–54) and Paul Rudolph (1957– today his name is associated with a lecture series and with the Eero Saarinen Visiting Professorship, endowed in 1962. Among leading architects who have served as Saarinen Visiting Professors was Thom Mayne (above 65). Dean Robert A. M. Stern is the left), the 2005 winner of the important Pritzker Prize. Shown here (above right) is one of Mayne’s recent works, current incumbent. the Diamond Bar High School near Pomona, California.

The Eero Saarinen Visiting Professor-ship, established in 1984 by architect Kevin Roche, colleagues, and friends, Scully, one of Yale’s most esteemed was established to provide for study honors the famous Yale-trained (b.f.a. faculty members. and travel outside the United States. 1934) architect of the David Ingalls Also crucial to the School’s success is The Henry Hart Rice Fund in Architec-Rink and Morse and Stiles Colleges. financial aid from endowed funds. The ture, created in 1999 by the Rice Family The list of architects who came to the Everett Victor Meeks (b.a. 1901, b.f.a. Foundation, supports teacher-directed School as Saarinen Visiting Professors 1917, m.a.h. 1919) Graduate Fellow- term-time travel for students at the included Pritzker Prize winning archi- ship Fund (1956) honors the former School of Architecture. tects Philip Johnson (the first Pritzker dean and professor. Classmates, friends, Endowed discretionary funds provide Prize recipient), Cesar Pelli, Zaha and business associates of Eero Saarinen crucial flexible support. The School’s Hadid, and Thom Mayne, the 2005 endowed a memorial scholarship in his first discretionary funds include the Pritzker Prize winner. name in 1962. The James Gamble Gertrude Vanderbilt Whitney Fund and Former Professor Louis I. Kahn, who Rogers (Class of 1889) Memorial Fel- the Robert W. DeForest Fund, both designed both the Yale University Art lowship Fund, endowed by his son in established in 1927 for general pur-Gallery and the Yale Center for British 1990, honors the architect who poses, and the Richard Hellmann Archi-Art, has inspired two separate funds. designed many Yale buildings in the tectural Fund (1973) endowed by the The Louis I. Kahn Visiting Professor- 1920s and 1930s, including Sterling Richard Hellmann Foundation “to be ship, funded by friends and colleagues Memorial Library, the Sterling Law used by the Dean, at his discretion, to in 1980, has brought to the School such Buildings, and residential colleges such take advantage of educational opportu-noted architects as Peter Eisenman, as Berkeley, Branford, and Saybrook. nities as they may arise.” Frank Gehry, Daniel Libeskind, Tod The School of Architecture has long Williams and Billie Tsien. An anony- recognized the importance of a global mous donor endowed the Kahn Visiting approach to the training of students, Assistant Professorship in 2003 as well encouraging travel and study abroad. as the Vincent Scully Visiting Professor- The William Wirt Winchester Fund ship in architectural history to honor (1895), the School’s most prestigious Sterling Professor Emeritus Vincent fellowship and its oldest endowment, School of Music Ives Scholarship for School of Music students.

The School of Music’s highest profile In a more popular musical vein, the endowed fund is most likely its newest, composer of Broadway musicals includ-an anonymous $100 million five-year ing Man of La Mancha, Mitch Leigh, pledge announced in October 2005. mus.b.1951, mus.m.1952, and his wife The gift, the largest in the School’s Abby Leigh have had a considerable history, will allow it to provide free impact on the fortunes of the School. tuition for all students beginning in the The building housing classrooms and 2006–2007 academic year, and to offices at 435 College Street bears the enhance its relationships with conserva-name of Leigh Hall in honor of their tories across the world. generosity, which includes support for The tuition subsidy from the new the Keith L. Wilson Scholarship Fund, gift builds on a strong existing base of established in 1984. The fund honors scholarship support. The Henry (b.a. American composer Charles E. Ives, b.a. 1898, is commemorated in three School of Music endowment Mr. Wilson, an award-winning clar-1900) and Lucy Moses Fellowship Fund funds. The photo of Ives in his summer home in inetist who taught at the School from (1990) and the Stephen and Denise West Redding, Connecticut, is believed to date from 1946 to 1987 and served as associate Adams Endowed Scholarship Fund for July 1950. dean. the School of Music (1999) each make Other great names grace the list of grants to more then a dozen students and history of music. One of many the School of Music’s endowed funds. per year; and the Horatio Parker Schol- prominent composers who have been Distinguished cellist Aldo Parisot arship Fund (1945) in honor of the affiliated with Yale, the innovative lent his name to a fund created for School’s first dean has been awarded to Charles E. Ives (1874–1954), b.a. 1898, scholarships in 1995 and donors have a number of outstanding musicians. inspired three different endowments. named endowments for legendary Individualized music instruction His widow, relatives, and friends pianists Vladimir Horowitz and began at Yale in 1854 thanks to a gift created the Charles E. Ives Memorial Artur Rubinstein. of $5,000 from Joseph Battell, a mer- Fund in 1962 for the maintenance and The School of Music enjoys a unique chant and music lover, whose family enhancement of the Charles E. Ives Col-distinction among the ten professional was generous to Yale in many ways. lection in the Library of the School of schools at Yale in that Music is the only The School of Music summer program Music. The collection contains the Ives school that has an endowed deanship. at Norfolk, Connecticut occupies the papers, a valuable resource for research Thanks to a bequest, the dean bears former Battell estate, and the Battell on one of America’s greatest composers. the title of the Henry (b.a. 1900) and family’s gifts include a professorship in In 1970, a bequest from Harmony T. Lucy Moses Dean of the Yale School the Yale Department of Music. Ives, the composer’s widow, established of Music.

The School of Music, founded in the Charles E. Ives Fund for general 1894, instructs students in performance support of the School. In 1985, Helen School of Drama and composition, while Yale’s T. Ives (wife of the composer’s nephew, Department of Music teaches theory Brewster Ives) funded the Charles In December 1924, the Yale Corporation recorded “the deep gratitude of the President and Fellows to Edward S.

Harkness, b.a. 1897, for his constant desire to further the development of the University as evidenced anew by his gift of one million dollars for the establish-ment of a Department of Dramatic Art in the School of Fine Arts.” Mr.

Harkness’s largesse permitted Yale to purchase land and erect the building for the University Theatre, besides providing an endowment for the drama department. In 1955, the department was reorganized to form the Yale School of Drama.

Endowed funds that supported the Department of Drama in its early decades included the Henry McCormick Professorship (1953) and the Henrietta Hoffman Lord Memorial Scholarship (1929) intended for promising women The Horatio Parker Scholarship Fund for students at the School of Music, established in 1945, honors the students. The Oliver Thorndike (Class School’s first Dean, composer-conductor Horatio Parker, shown in a portrait by Erica von Kager. Recipients have of 1940) Acting Award Fund, estab-included noted clarinetist Richard L. Stoltzman (shown above, right); pianist Joan C. Panetti, a long-time faculty member at the School; baritone Patrick J. Carfizzi of the Metropolitan Opera; and Paul A. Jacobs, chairman of lished in 1957, shortly after Drama the Organ Department at the Juilliard School.

Yale already had on its books the original Drama department faculty Eugene O’Neill (litt.d. hon. 1926) members in 1925 and started the Memorial Scholarship Fund, established Design department in 1926. He retired in 1958 to honor the playwright. from the School in 1970, but his theater As director of the Rep and dean career continued; he was active as a of the School of Drama from 1979 to Broadway designer, producer, and per-1991, Lloyd Richards played an impor- former from 1925 to 1975, working in tant role in the history of drama at dozens of original productions of such Yale. Under his direction the Repertory shows as The Man Who Came to Theatre launched major plays by such Dinner, Of Mice and Men, and Sabrina figures as Lee Blessing, Athol Fugard, Fair. Presented to Yale by his widow, and August Wilson. Mr. Richards, who Mary P. Oenslager, the professorship made history in 1958 as the first has been held since its inception by African-American director to work on noted Broadway designer Ming Broadway, is recognized at the School Cho Lee. by the Lloyd Richards Professorship In taking stock on the occasion of Fund (1991), established by a group the University’s 300th anniversary, in of his friends and admirers. 2001, President Richard C. Levin In the field of design, the School stated, “Yale is arguably the premier received an endowment in 1995 for the university in the world in the humani-Donald M. Oenslager Professorship for ties and the arts.” Endowments provide Scene, Costume, and Lighting Design. funds critical to achieving, maintaining, Meryl Streep was the 1975-76 recipient of the Annie The late Mr. Oenslager was one of the and enhancing Yale’s artistic excellence. G. K. Garland Memorial Fellowship Fund while studying at the School of Drama. The photograph shows her in a Yale Repertory Theatre performance of The Idiots Karamazov (by Christopher Durang and Albert Innaurato) in 1974 with Ralph Redpath.

Ms. Streep was associated with another endowment as winner of the Oliver Thorndike Prize at the School, a prestigious award that has gone to such well-known figures as Stacy Keach, Mark Baker, and Richard Grusin.

became a full-fledged Yale professional school, recognizes outstanding students, including such luminaries as Meryl Streep and Stacy Keach. The George Pierce Baker (m.a.h. 1925) Memorial Scholarship Fund (1960) honors the first chairman of the Department of Drama, the country’s then-leading teacher of playwriting, who joined the Yale faculty in 1925.

An endowment from the Ford Foun-dation in 1978 proved helpful to the School and its sister institution, the Yale Repertory Theatre. The Yale Rep, founded in 1966 as a performance Established in 1991, the Lloyd venue, adds considerably to the theatri- Richards Professorship at the cal life of the School. Another impor- School of Drama honors the former dean of the School and tant unrestricted endowment, the artistic director of the Yale Simsbury Fund, created by Virginia Repertory Theatre. Richards Brockman and Robert E. Darling, Jr. directed several works at Yale in 1980, provides financial support by playwright August Wilson for the Drama School and the Rep. (seen at right, wearing hat, with Richards at the theater), including Important names in American The Piano Lesson. The original theater and film have strong associa- production of the play at Yale in tions with the School of Drama’s 1987 starred Samuel L. Jackson endowment. Nobel Prize winning play- (seen in photo above with LaJara Henderson). wright Eugene O’Neill, who received an honorary Doctor of Letters in 1926, and his widow, Mrs. Carlotta O’Neill created the Eugene O’Neill Scholarships through a 1970 bequest. At that time, Spending Policy The spending rule is at the heart of fiscal discipline for an endowed institution. Spending policies define an institution’s compromise 4 between the conflicting goals of providing substantial support for current operations and preserving purchasing power of Endowment assets. The spending rule must be clearly defined and consistently applied for the concept of budget balance to have meaning. Yale’s policy is designed to meet two competing objectives. The first goal is to release substantial current income to the operating budget in a stable stream, since large fluctuations in revenues are difficult to accommodate through changes in University activities or programs. The second goal is to protect the value of Endowment assets against inflation, allowing programs to be supported at today’s level far into the future.

Yale’s spending rule attempts to achieve these two objectives by using a long-term spending rate combined with a smoothing rule that adjusts spending gradually to changes in Endowment market value. The amount released under the spending rule is based on a weighted average of the prior year’s spending adjusted for inflation and an amount determined by applying the target rate to the current Endowment market value.

The spending rule has two implications. First, by incorporating the previous year’s spending the rule eliminates large fluctuations, enabling the University to plan for its operating budget needs. Over the last twenty years, annual changes in spending have been less than a third as volatile as annual changes in Endowment value. Second, by adjusting spending toward the long-term target spending level, the rule ensures that spending will be sensitive to fluctuating Endowment market values, providing stability in long-term purchasing power.

Spending Growth Surpasses Inflation 1950-2005 $600 $500 $400 Millions $300 $200 $100 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 1950 Spending Inflated Spending from Post-1950 Endowment Gifts Inflated Actual Spending In fiscal 2005 the Yale Corporation adopted changes in the spending policy designed to increase the stability of flows to the operating budget. Because Endowment support for operations increased from 11 percent of revenues in fiscal 1985 to 32 percent in fiscal 2005, prospective declines in Endowment value carry greater risk for Yale’s activities. To mitigate that risk the new spending policy places greater weight on the stabilizing factor of last year’s spending (moving to 80 percent from 70 percent) and less weight on the volatile factor of the target Endowment spending level (moving to 20 percent from 30 percent). In large part to reflect the new rule’s reduced sensitivity to current market values, the target spending rate increased to 5.25 percent from 5.0 percent.

Despite the conservative nature of Yale’s spending policy, distributions to the operating budget rose from $149 million in fiscal 1995 to $567 million in fiscal 2005. The University projects spend-ing of $613 million from the Endowment in fiscal 2006, representing 33 percent of revenues.

Kimberly E. Stewart Joyce M. Jepsen Entryway to the Hall of Graduate Studies.

History of Yale’s Spending Policy Until the mid 1960s, the University returns would lead to reduced spending. the targeted long-term spending rate limited the Endowment’s annual contri- Unfortunately, the University Equation of 4.5 percent applied to the previous bution to the operating budget to did not adjust rapidly enough to year’s Endowment’s market value. The investment yield – the interest, dividend changes in Endowment market value. 70 percent weight on prior year spend-and rental income generated by the As a result, in the 1970s, when inflation ing promised budgetary stability, while Endowment. In 1967, recognizing that increased and market returns dropped, the 30 percent weight on current simply spending yield could result in the University spent an unsustainably market value provided purchasing too high or too low a spending rate and high portion of the Endowment to power sensitivity. could bias investment decisions toward support current operations. Since 1982, the spending rule has securities with high yield but low appre- In 1977, recognizing that the rate of been adjusted three times. In 1992 the ciation potential, Yale adopted a total spending was eroding the real value of Corporation authorized an increase in return spending policy. Under the total the Endowment, the Yale Corporation the long-term spending rate from 4.5 return policy, the University supported voted to cap spending at the existing percent to 4.75 percent. In 1995 Yale operations with current yield plus a level (adjusted for inflation) until the adopted a further increase in the target prudent portion of the appreciation of spending rate was brought in line with rate to 5.0 percent. In 2004 the Corpo-Endowment market value. the expected real (after-inflation) return ration increased the spending rate to Concurrent with the decision to from the Endowment. The Endow- 5.25 percent and changed the smooth-employ a total return concept, Yale ment’s expected real return was taken ing rule from 70/30 to 80/20. The instituted a formal method, called the to be 4.5 percent, consistent with his- increases in spending rates resulted “University Equation,” to calculate torical experience. from improvement in Endowment port-the total amount that could responsibly In 1982, upon bringing the spending folio characteristics. The change in be spent from the Endowment. The level to an appropriate level, the Corpo- weight assigned to budgetary stability method set spending in a given year by ration adopted a spending rule that stemmed from recognition that adjusting the previous year’s spending attempted to produce substantial increased budgetary dependence on by the difference between the Univer- income for current scholars and pre- Endowment income required greater sity’s long-term investment return (mea- serve purchasing power of the Endow- stability in flows of Endowment income sured over the prior twenty-year period) ment for future generations. Under the to support operations. and the current percentage of the new rule, Endowment spending Endowment being spent. Higher long- amounted to the weighted average of 70 term returns would lead to higher percent of the previous year’s spending, annual spending, while lower long-term adjusted for inflation, plus 30 percent of Yal Yale’se’s Endowment Endowment Spending Spending Rate Rate 1950–2005 1950–2005 8% 7% 6% 5% 4% 3% 2% 1% 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Spending Rate Monte Carlo Simulations To assess the efficacy of various combi- trade-off between easily understood cri-nations of investment and spending teria: stable operating budget support policies, the Investments Office devel- (probability of losing 10 percent of oped a model that uses simulations to Endowment spending) and purchasing evaluate the impact of a range of policy power preservation (probability of combinations on Yale’s Endowment and losing 50 percent of Endowment pur-operating budget. Using “Monte Carlo” chasing power). techniques, the model employs random Monte Carlo simulations applied to numbers to produce portfolio return the Endowment’s current target asset patterns consistent with assumptions allocation and spending policies indicate regarding asset class expected risk and a 24 percent chance of real spending return characteristics. The resulting falling by more than 10 percent over path of simulated returns determines a five-year span. Although the Endow-Endowment values and spending levels, ment’s real growth rate is expected to based on the modeled investment and outpace the 5.25 percent target spend-spending policies. Thousands of simula- ing rate, a roughly 17 percent chance tions provide a robust picture of the exists that the purchasing power of the potential effectiveness of any given Endowment would drop by more than policy combination. 50 percent after fifty years.

The two criteria used to analyze the Using the metrics of stable operating results of various policies are: 1) the budget support and purchasing power likelihood of a significant, sustained preservation, the Endowment demon-intermediate-term drop in Endowment strated substantial improvement over support for the operating budget; and the past fifteen years. As Yale allocated 2) the likelihood of a dramatic long- more of the Endowment to the alterna- moving average of endowment value), term reduction in Endowment purchas- tive asset classes of absolute return, the Investments Office estimates that the ing power. A significant decline in sup- private equity, and real assets, risks average endowment faces a 36 percent port for the operating budget is defined plummeted for both a significant decline chance of a 10 percent spending drop as a real reduction of 10 percent over a in spending and a dramatic reduction in over five years and runs a 33 percent five-year period. A dramatic decline in Endowment purchasing power. In 1990, chance of losing half of its purchasing Endowment purchasing power is when alternative asset classes accounted power over a fifty-year period. defined as a 50 percent drop over a for only 15 percent of the Endowment, After fifty years, the median ending fifty-year horizon. Yale faced a 34 percent chance of real purchasing power of the average The Monte Carlo simulations repre- spending dropping 10 percent over five endowment amounts to only 61 percent sent a substantial extension of (and years and a 31 percent chance of real of its beginning purchasing power. In improvement over) conventional mean- Endowment values diminishing by 50 general, educational institutions spend variance optimization techniques. percent over fifty years. By 2000, when at rates far too high to be supported by Mean-variance analysis simply identifies absolute return, private equity, and real undiversified portfolios that contain too a set of efficient portfolios, namely port- assets accounted for nearly 60 percent many low-returning assets. Yale’s simu-folios with the highest return for a of the Endowment, disruptive spending lations show relatively significant prob-given level of risk or portfolios with the drop risk fell to 24 percent and pur- abilities of circumstances that would be lowest risk for a given level of return. chasing power impairment risk declined traumatic for educational institutions, The mean-variance framework provides to 14 percent. highlighting the tenuous balance no intuitive mechanism for portfolio Investment and spending policies of between protecting Endowment pur-choice and fails to incorporate the other educational institutions provide chasing power and maintaining a steady impact of spending policy. In contrast, more disturbing results. Using Monte and substantial stream of spending. by extending the analysis with Monte Carlo simulations and the typical Carlo simulations, decision makers endowment spending rule (5 percent enjoy the opportunity to assess the target rate applied to a three-year Investment Performance Yale has produced excellent investment returns. Over the ten-year period ending June 30, 2005, the Endowment earned an annualized 5 17.4 percent return, net of fees, placing it in the top one percent of large institutional investors. Endowment outperformance came from sound asset allocation policy and superior active management. Yale’s long-term superior performance relative to its peers and benchmarks created substantial wealth for the University. Over the ten years ending June 30, 2005, Yale added $6.3 billion relative to its composite benchmark and $6.7 billion relative to the average return of a broad universe of college and university endowments.

Performance by Yale’s long-term asset class performance continues to be outstanding. In the past ten years every asset class posted superior returns, signifi-Asset Class cantly outperforming benchmark levels. For the decade ending June 30, 2005, the domestic equity portfolio returned an annualized 15.7 percent, outperforming the Wilshire 5000 by 5.8 percent per year and the Russell Median Manager return by 5.3 percent per year. Yale’s active managers have added value to benchmark returns primarily through stock selection. Yale’s internally managed fixed income portfolio earned an annualized 7.4 percent over the past decade, exceeding the Lehman Brothers Treasury Index by 0.7 percent per year and the Russell Median Manager return by 0.5 percent per year. By making astute security selection decisions and accepting illiquidity, the Endowment benefited from excess returns without incurring material credit or option risk.

Over the past decade, the absolute return portfolio produced an annualized 13.1 percent, exceeding the passive benchmark of the One-Year Constant Maturity Treasury plus 6 percent by 2.4 percent per year and besting its active benchmark of hedge fund manager returns by 0.8 percent per year. For the ten-year period, absolute Yale’s Performance Exceeds Peer Results 1995 to 2005, 1995 = 100 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Endowment Mean of Broad Universe of Colleges and Universities Inflation return results exhibited essentially no correlation to traditional marketable securities. The foreign equity portfolio generated an annual return of 12.7 percent over the ten-year period, outperforming its composite benchmark by 6.5 percent per year and the Russell Median Man-ager return by 5.2 percent per year. The portfolio’s excess return is due to effective security selection and country allocation by active managers.

Results from Yale’s non-marketable assets demonstrate the value of superior active management. Private equity earned 39.5 percent annually over the last ten years, outperforming the passive benchmark of University inflation plus 10 percent by 25.5 percent per year and the return of a pool of private equity managers com-piled by Cambridge Associates by 17.6 percent per year. Since inception in 1973, the private equity program has earned an astounding 31.0 percent per annum.

Real assets generated a 17.7 percent annualized return over the ten-year period, outperforming the passive benchmark of University inflation plus 6.0 percent by 7.9 percent per year and an active benchmark of real assets manager returns by 4.9 percent per year. Yale’s outperformance is due to the successful exploitation of market inefficiencies and timely pursuit of contrarian investment strategies.

Yale Asset Class Results Trounce Benchmarks 1995–2005 45% 40% 35% 30% 25% 20% 15% Helen M. Betts 10% 5% Domestic Equity Fixed Income Foreign Equity Absolute Return Private Equity Real Assets Yale Return Active Benchmark Passive Benchmark Active Benchmarks Passive Benchmarks Domestic Equity: Frank Russell Median Manager, Domestic Equity: Wilshire 5000 U.S. Equity Fixed Income: Lehman Brothers Treasury Index Fixed Income: Frank Russell Median Manager, Fixed Income Foreign Equity: 50% MSCI EAFE Index, 50% MSCI EM Index Foreign Equity: Frank Russell Median Manager Absolute Return: 1-year Constant Maturity Treasury + 6% Composite, Foreign Equity Private Equity: University Inflation + 10% Absolute Return: CSFB Composite Real Assets: University Inflation + 6% Private Equity: Cambridge Associates Composite Kelsie L. Newsom Real Assets: NCREIF and Cambridge Associates Composite Degree of Investment Opportunity Yale directs active management efforts markets present no mispricings for active managers and that less efficiently to less efficiently priced asset classes active managers to exploit, good results priced assets provide more opportunity. and employs less aggressive, diversified stem from luck, not skill.

Over time, The accompanying chart shows approaches for more efficiently priced managers in efficient markets gravitate active manager returns for various asset assets. Given equal expenditure of time toward “closet indexing,” structuring classes for the decade ending June 30, and effort, active management promises portfolios with only modest deviations 2005. U.S. Treasury securities, arguably greater rewards in the infrequently from the market, ensuring both medioc- the most efficiently priced asset in the traded, illiquid world of private equity rity and survival. world, trade in staggering volumes in than in the heavily traded, liquid world In contrast, active managers in less markets dominated by savvy financial of government bonds. efficient markets exhibit greater vari- institutions. Since nobody (possibly In the absence of direct measures of ability in returns. In fact, many private excepting the Federal Reserve) knows market efficiency, active manager behav- markets lack benchmarks for managers where interest rates will be, few manior provides clues about the degree of to “hug,” eliminating the problem of agers employ interest rate anticipation opportunity in various markets.

In closet indexing. Inefficiencies in pricing strategies. Without potentially powerful those markets with limited opportuni- allow managers with great skill to differentiating bets on interest rates, ties for active management, managers achieve great success, while unskilled institutional portfolios tend to exhibit deviate little from the market portfolio, managers post commensurately poor market-like interest rate sensitivity, or tending to obtain market-like returns. results. Hard work and intelligence reap duration. As a result, managers gener-Why do managers in efficient markets rich rewards in an environment where ally limit themselves to modest security “hug” the benchmark? In a world of superior information and deal flow selection decisions, causing returns for efficiently priced assets, consider the provide an “edge.” most active managers to mimic bench-business consequences to investment The degree of opportunity for active mark results. The spread between first managers who hold portfolios that management (at least as measured by and third quartile results for active differ markedly from the market portfo- manager behavior) relates to the distri- bond managers measures an astonishlio.

Non-market weightings in security bution of actively managed returns in a ingly small 0.5 percent per annum for holdings cause portfolio results to vary particular asset class. Any measure of the decade. dramatically from the benchmark. dispersion provides some sense of where Stocks provide more difficult pricing Under-performing managers lose clients, active management opportunities lie. challenges than bonds. Instead of dis-suffering a punishing loss in assets, The spread in returns between the first counting relatively certain fixed income while overachievers gain clients (and and third quartiles in collections of cash flows, valuation of equities public adulation). Yet, because efficient actively managed portfolios illustrates involves discounting more-difficult-to-markets price securities accurately, the notion that more efficiently priced project corporate cash flows. The success will be transitory. Since efficient assets provide less opportunity for greater volatility in equity markets also Dispersion of Active Management Returns Asset Returns by Quartile.

Ten Years Ending June 30, 2005 Asset Class First Median Third Range Quartile Quartile U.S. Fixed Income 7.2% 6.9% 6.7% 0.5% U.S. Large Capitalization Equity 11.3 10.4 9.4 2.0 U.S. Small Capitalization Equity 15.3 13.2 10.5 4.7 International Equity 9.7 8.2 5.7 4.0 Absolute Return 15.6 12.5 8.5 7.1 Real Estate 17.6 12.0 8.4 9.3 Leveraged Buyouts 13.3 8.0 -0.4 13.7 Venture Capital 28.7 -1.4 -14.5 43.2 contributes to the wider active manager bottom quartiles. The radical break tion bets. At the opposite end of the spread. comes when moving to venture capital spectrum, the Investments Office Less efficiently priced securities trade and leveraged buyouts. For the ten-year devotes considerable time and effort in wider ranges. Large-capitalization period, leveraged buyouts and venture to identify opportunities in the far less domestic equities represent the next capital exhibit extreme 13.7 percent efficient private equity market. The rung of the efficiency ladder, with a and 43.2 percent per annum spreads. Endowment bond portfolio, structured range of 2.0 percent between top and Selecting top quartile managers in with respect for market efficiency, pro-bottom quartiles.

Foreign developed private markets leads to much greater duced a 0.7 percent per annum excess market equities exhibit a range of 4.0 reward than identifying top managers return over the past decade. In contrast, percent. Domestic small-capitalization in public markets. In the extreme case, Yale’s private equity positions boast a stocks show the biggest performance over the past decade, choosing a first 39.5 percent per annum return over the gap, with a range of 4.7 percent per quartile fixed income manager added last ten years, far exceeding the 21.9 annum between top and bottom quar- only 0.3 percent per annum relative to percent per annum results of a pool of tiles. The progression of degree of the median result. In contrast, the first private equity managers compiled by opportunity across types of marketable quartile venture capitalist added 30.1 Cambridge Associates. While both the securities makes intuitive sense. percent per annum relative to the bond portfolio and private equity port-Absolute return strategies, which median, providing a much greater con- folio benefited from superior active generate returns independent of markets tribution to portfolio results.

Ironically, management, the absolute contribution and lack a benchmark to “hug,” identifying superior managers in the from superior results in the inefficient demonstrate less efficiency than fixed relatively inefficiently priced private world of private equity far exceeded the income and equity securities with a markets proves less challenging than in contribution from superior results in the range of 7.1 percent between top and the efficiently priced marketable securi- efficient world of government bonds. bottom quartiles. ties markets. Careful consideration of the degree of Real estate, with its high level of In the ultra-efficient bond market, market opportunity when structuring current income, constitutes the most Yale holds a portfolio with market-like portfolios makes an important contribu-efficient private investment class, with interest rate sensitivity, making occa- tion to Yale’s investment performance. a range of 9.3 percent between top and sional carefully controlled security selec- Alternative Asset Returns Exhibit Significant Dispersion Asset Returns by Quartile.

Ten Years Ending June 30, 2005 30.0 25.0 20.0 Dispersion of Returns 15.0 10.0 5.0 0.0 -5.0 -10.0 -15.0 U.S. Fixed U.S. Large U.S. Small International Absolute Real Leveraged Venture Income Capitalization Capitalization Equity Return Estate Buyouts Capital Equity Equity First Quartile Median Third Quartile Sources: Data for marketable securities are from Russell/Mellon. The absolute return, real estate, leveraged buyout, and venture capital data are from Cambridge Associates. Real Estate, leveraged buyout, and venture capital represent returns on funds formed between 1995 and 1999, excluding more recent returns so that immature investments will not influence results.

Management and Since 1975, the Yale Corporation Investment Committee has been responsible for oversight of the Endowment, incorporating senior-Oversight level investment experience into portfolio policy formulation. The Investment Committee consists of at least three Fellows of the Corporation and other persons who have particular investment expertise. The Committee meets quarterly, at which time members review asset allocation policies, Endowment performance, and strategies proposed by Investments Office staff. The Committee approves guidelines for investment of the Endowment portfolio, specifying investment objectives, spending policy, and approaches for the investment of each asset category. Eleven individuals currently sit on the Committee.

Investment Committee Current Members Richard C. Levin ’74 ph.d. Charles D. Ellis ’59 G. Leonard Baker ’64 President Chairman Managing Director Yale University Former Managing Partner Sutter Hill Ventures Greenwich Associates Joshua Bekenstein ’80 Roland W. Betts ’68 James Leitner ’75 Henry F. McCance ’64 Managing Director Chairman President President Bain Capital Chelsea Piers Management Falcon Investment Greylock Management Management Jane L. Mendillo ’80, William I. Miller ’78 Theodore P. Shen ’66 Douglas A. Warner iii ’68 ’84 mba Chairman Former Chairman Former Chairman of the Board Chief Investment Officer Irwin Financial Corporation DLJ Capital Markets J.P. Morgan Chase Wellesley College The Investments Office manages the Endowment and other University financial assets, and defines and implements the University’s borrowing strategies. Headed by the Chief Investment Officer, the office currently consists of twenty professionals.

Investments Office Staff David F. Swensen ’80 ph.d. David B. Slifka ’01 Chief Investment Officer Senior Associate Dean J. Takahashi ’80, ’83 mppm Celeste P. Benson Senior Director Senior Portfolio Manager Seth D. Alexander ’95 Anne Martin Director Senior Research Consultant Alexander C. Banker Shuba V. Raghavan Director Senior Research Associate Alan S. Forman Jay L. Kang ’02 Director Senior Financial Analyst Timothy R. Sullivan ’86 Daniel G. Kilpatrick ’03 Director Senior Financial Analyst Kenneth R. Miller ’71 Carrie A. Abildgaard Associate General Counsel Financial Analyst Michael E. Finnerty Dennis Hong ’05 Associate Director Financial Analyst Randy Kim ’98, ’04 mba Nicholas T. Shalek ’05 Associate Director Financial Analyst Peter H. Ammon ’05 mba, Xiaoning Wu ’04 ’05 ma Financial Analyst Senior Associate The Exhibit Corridor, Sterling Memorial Library.

Ethical Investing Policy Yale was one of the first institutions to address formally the ethical responsibilities of institutional investors. In 1969 Professors John 7 Simon, James Tobin, William Brainard, and Charles Lindbloom along with Yale graduate students Charles Powers and Jon Gunne-mann conducted a seminar entitled “Yale’s Investments,” which explored the ethical, economic, and legal implications of institutional investments. As a result of the seminar, Simon, Powers, and Gunnemann wrote The Ethical Investor: Universities and Corporate Responsibility. Published in March 1972 by Yale University Press, the book established criteria and procedures by which a university could respond to requests from members of its community to con-sider factors in addition to economic return when making invest-ment decisions and exercising rights as a shareholder. It remains the definitive work in its field.

The Yale Corporation adopted the guidelines outlined in The Ethical Investor in April 1972 and Yale became, according to the New York Times, “the first major university to resolve this issue by abandoning the role of passive institutional investor.” The book subsequently served as a blueprint for the ethical policies of a number of universities.

In the academic year following the publication of The Ethical Investor, Yale established the Advisory Committee on Investor Responsibility (acir). The inaugural committee addressed social Professor John Simon, Yale Law School, with responsibility issues ranging from company investment in South Charles Powers and Jon Gunnemann, published Africa to defense contracting, political lobbying, and environmental The Ethical Investor in 1972, making Yale, according to the New York Times, “the first safety. Later, the Yale Corporation formed the Corporation Com-major university to resolve this issue by mittee on Investor Responsibility (ccir). abandoning the role of passive institutional investor.” The CCIR is composed of Fellows of the Corporation. It recom-mends policy to the full Corporation and is charged with imple-menting the approved policy. In discharging its responsibility, the CCIR is assisted by the acir. The acir is composed of two students (one undergraduate and one graduate), two alumni, two faculty, and two staff members. The acir performs the practical work of policy implementation for the ccir. Two of the acir’s principal tasks are to advise the ccir on the voting of corporate proxies dealing with ethical issues and to communicate with companies that might not be in compliance with Yale’s ethical policy on investments.

The Ethical Investor, first published by Yale University Press in 1972, served as a blueprint for the ethical policies of a number of universities.

Guidelines for the The Yale Corporation has adopted the “Suggested Guidelines for the Consideration of Factors Other than Maximum Return in the Voting of Shares Management of the University’s Investments” contained in The Ethical Investor. The concept of social injury rests at the heart of the policy’s approach to voting and divestment procedures as recommended by the guidelines, which, in relevant part, provide that: “Social injury is the injurious impact which the activities of a company are found to have on consumers, employees, or other persons, particularly including activities which violate, or frustrate the enforcement of, rules of domestic or international law intended to protect individuals against deprivation of health, safety, or basic freedoms; for the purposes of these Guidelines, social injury shall not consist of doing business with other companies which are themselves engaged in socially injurious activities. “The University will not vote its shares on any resolution which advances a position on a social or political question unrelated to the conduct of the company’s business or the disposition of its assets.

“The University will vote for a proposition which seeks to eliminate or reduce the social injury caused by a company’s activi-ties, and will vote against a proposition which seeks to prevent such elimination or reduction, where a finding has been made that the activities which are the subject of the proposition cause social injury. This paragraph will not apply to any proposition which seeks to eliminate or reduce social injury by means which are found to be ineffective or unreasonable.”

In 1989 the ccir advised the acir that shareholder action may be taken only in response to issues that involve “substantial social injury” and that are “susceptible to competent evaluation by the University under criteria reflecting broad moral consensus within the academic community.” Votes in favor of proxy resolutions “should be preceded by a determination that the issue is one on which it is appropriate for the University to take a formal position as a shareholder.”

Past Actions Regarding In 1978 the Yale Corporation adopted a policy on investing in South Africa. Emphasizing Yale’s deeply held opposition to Major Issues apartheid, the policy addressed the University’s belief that it had “an ethical duty to contribute to the process of peaceful change” in South Africa the country. Recognizing that the most effective method of achieving enduring change was through active participation, Yale initiated dialogues with each U.S.-based company operating in South Africa in which the University was a shareholder. The focus of these efforts was to promote management’s adherence to the principles of fair and equitable employment practices and the elimination of segregation.

To assess portfolio companies’ level of compliance with Yale’s ethical investing policy, the University sent a ten-member delegation to South Africa in 1986. Composed of Yale Corporation fellows, faculty, administrators, and students, the delegation visited U.S. and South African companies to assess their roles in the apartheid system. The delegation also met with representatives from three South African universities to discuss actions that might be under-taken to improve and strengthen black education. The fact-finding mission allowed Yale to apply more effective, constructive pressure to align corporate activity with ethical imperatives.

Through its efforts as a shareholder, Yale made significant progress in advancing its message to corporations. In those situations in which it became apparent that a company’s actions would continue to be incompatible with University policy, Yale sold shares. From 1978 through 1994, Yale divested shares of seventeen companies operating in South Africa, representing a total market value of approximately $23 million. In February 1994, recognizing the positive changes occurring in the country, the Yale Corporation lifted all investment restrictions.

Tobacco Throughout the 1990s, the Corporation thoroughly reviewed the holding of tobacco-related stocks. As a result of the reviews, in 1994 the Corporation established guidelines on voting of tobacco proxies. These instructions were supplemented in 1996, when the ccir directed the acir to vote in favor of well-constructed proxy resolutions that: (a) call upon tobacco companies to place health warnings about the dangers of addiction, disease, and death caused by smoking on all advertising and promotional items for tobacco products distributed throughout the world; (b) request companies to cease advertising tobacco products to minors, including all uses of the company’s brand names and associ-ated symbols for sponsorships; (c) request tobacco companies to support enforcement mechanisms at all governmental levels to prevent illegal sales of tobacco products to minors; (d) request tobacco companies to take actions designed to reduce Tobacco advertisement, poster circa 1900. the health risks to minors; Tobacco & Textile Museum.

(e) call upon tobacco companies to report publicly accurate information relating to the ingredients of their products that have probable adverse health effects. The Corporation voting guidelines stem, in part, from an acir report that found the possibility of social injury in the marketing and distribution of tobacco products, not in their manufacture. As a result, the University chooses to engage tobacco companies in dialogue, hoping to change objectionable policies and procedures.

Ethical Oversight of In the 2001-2002 academic year the acir and the Yale Investments Private Investments Office took up the issue of ethical oversight of private investments. Applying existing policies to private holdings posed a challenge, because the shareholder resolution activity of the acir had no analog in private investment holdings. In the realm of private assets, where corporate control rests in a highly concentrated investment group, shareholder resolutions do not exist.

To address this issue, the Yale Investments Office, in consultation with the acir, developed a framework to address ethical issues relating to private investments. In particular, ethical investing policies recommended by the acir and adopted by the Yale Corporation are to be applied to both marketable securities and private invest-ments. The University's response to ethical issues in private invest-ments would differ in some respects from the response for publicly traded securities, because of the nature of the investment structures and potential remedies. Oversight of policy implementation would remain with the ccir for both marketable and private positions. The Yale Corporation has articulated the following policy with regard to private investments: “When the Yale Corporation, upon recommendation of the Corporation Committee on Investor Responsibility after its consultation with the Advisory Committee on Investor Responsibility, adopts policies regarding ethical investing, those policies will apply to both public and private investments. In the event that the Corporation concludes that Yale’s private investment managers have engaged in socially injurious activity, the University will fashion an appropriate remedy including use of voice, disassociation from the offending investment manager, and, as a last resort, disposition of the tainted partnership interests.”

Sources Photo Credits Much of the material in this publication Front cover: Steve Dunwell Page 29 is drawn from memoranda produced by Photography, Inc., Boston Meryl Streep and Ralph Redpath, the Investments Office for the Yale Inside back cover: Michael Marsland, by William Baker, 1974, Yale School Corporation Investment Committee. Office of Public Affairs of Drama. Other material comes from Yale’s The Piano Lesson, photo, Sterling financial records, Reports of the Page 8, Photo of David Swensen Memorial Library Manuscripts and Treasurer, and Reports of the President. Alan S. Orling Archives.

Lloyd Richards and August Wilson, Pages 6-7 Page 12 Yale Repertory Theatre.

Yale data from George W. Pierson, Sterling Memorial Library Manuscripts A Yale Book of Numbers: Historical and Archives Page 31 Statistics of the College and University Hall of Graduate Studies, photo by 1701-1976 (New Haven: Yale Page 13 Nicholas Field.

University Press, 1983); Yale Office Sports Publicity, Yale Athletics of Institutional Research; and Yale Page 38 Department of Capital Budget Page 26 Courtesy of Charles D. Ellis, G. Management. Portrait of William C. Leffingwell Leonard Baker, Joshua Bekenstein, (1765-1834), b.a. 1786, m.a. 1789, Roland W. Betts, James Leitner, Henry Data on other universities: U.S. News Yale University Art Gallery, gift of F. McCance, Jane L. Mendillo, William and World Report, “America’s Best Lucius Wooster Leffingwell, b.a. 1814, I. Miller, Theodore P. Shen, and Colleges,” August 29, 2005. m.a. 1825. Douglas A. Warner iii.

Painting: B1993.7, Tree of Life (Clair), Pages 10-24 Andrew Forge (1923-2002), 1987-89, Page 40 Educational institution asset allocations oil on canvas, Yale Center for The Ethical Investor, Yale University from Cambridge Associates. British Art. Press Photograph of Andrew Forge, Page 34 courtesy of Ruth Miller. All other photographs The Endowment’s annual return for the Michael Marsland ten years ending June 30, 2005 ranks in Page 27 the top one percent of institutional Photo of E. Saarinen by Allan A. Tuttle, Design funds as measured by the sei Large Sterling Memorial Library Manuscripts Plan Universe. and Archives. Strong Cohen Thom Mayne, photo by John Jacobson.

Page 36 Diamond Bar High School, Brandon Degree of Investment Opportunity, Welling. based on David F. Swensen, Pioneering Portfolio Management: An Unconventional Approach to Page 28 Institutional Investment Photo of Charles Ives by George Tyler, (New York: Free Press, 2000). from mss 14, The Charles Ives Papers in the Irving S. Gilmore Music Library, Pages 40-43 Yale University.

Ethical Investing Policy, based on John Horatio Parker, portrait by Erica G. Simon, Charles W. Powers, von Kager, Yale School of Music. and Jon P. Gunnemann, The Ethical Richard L. Stoltzman, by Carol Investor: Universities and Corporate Weinberg, Frank Salomon Associates, Responsibility (New Haven: Yale New York.

University Press, 1972).

Opposite: Gateway to Old Campus from Elm Street, near Yale Station.